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How To Spot A Closet Index Fund

It may charge a hefty management fee, but its porfolio is pretty generic

Pop open the hood of the Putnam Voyager Fund, and the contents may look familiar. That's because its top five holdings -- Pfizer (PFE ), Microsoft (MSFT ), Intel (INTC ), Cisco Systems (CSCO ), and Johnson & Johnson (JNJ ) -- are also the same top five that are in its benchmark, the Russell 1000 Growth Index. If you look at Voyager's recent returns, they're very similar to the Russell index as well. The only major difference: Voyager's performance lags after subtracting its management fees.

Voyager is, as the fund experts say, a "closet index fund." It charges relatively high fees for what is essentially a generic portfolio. This isn't much of an issue for many investors in a bull market, when returns are high. But when the market is stagnant or sagging, as it is now, it can hit your bottom line badly. Voyager's 1% annual expense ratio is below average for equity funds, but in an environment in which stocks are expected, at best, to deliver only 8% or 9% a year, the fee consumes more than 10% of your total return. A comparable index fund, iShares Russell 1000 Growth (IWF ), offers similar results for one-fifth the cost.