Gimmick funds might be cute, but they're often bad investments


The "free fund" is gone. The "death fund" will be soon.

They will not be missed.

We come together today to bury the Standard & Poor's 500 index fund and the Pauze Tombstone fund, not to praise them.

The dearly and nearly departed funds ('s fund shut down earlier this month, while the Tombstone fund gets the Big Sleep tomorrow) were known entirely for their shtick. Their deaths serve as a reminder that investment prowess determines investing success, and that gimmicks are dumb. -- a Web site that has developed into a manager of mutual funds -- was offering its index fund for free, waiving all expenses so that the shareholder would get the pure return of the index. The idea was to have the fund act as a loss leader, pulling investors into the start-up fund family of self-described "naked mutual funds," so called because they post their portfolios live on the Internet.

It was a bad idea that was poorly executed.

For starters,'s other funds are technology-driven issues designed to appeal mostly to Webheads.

That's not your typical index diehard. In fact, the kind of person who makes an index fund a core holding for the rest of his life is the very type of investor who is likely to think's other funds are a disaster in the making.

Similarly, the core devotee is not likely to want a stodgy, old index fund.

So it's no surprise that the free index fund never caught on and that assets never passed $1 million. The fund was so cash poor that it never bought stocks, investing instead in Standard & Poor's Depositary Receipts, or Spiders, which mirror the index. Stockjungle ate the trading costs to buy Spiders, but Spiders actually have their own expense ratio; that means the fund's investments weren't cost-free, after all.

(Another Internet-driven "free" index fund run by has attracted more money and avoided similar start-up problems.)

Pauze Tombstone, meanwhile, was based on the firm's "Tombstone Index" (ticker symbol RIP), which tracks the "death care" industry.

Given recent market events, it might be closing at exactly the wrong time, because while many consumer businesses get hurt in downturns and bear-market conditions, death never takes a holiday, and so the industry should pick up.

That said, this fund boiled down to a sector fund of funeral services companies, an area so thin -- the index has just nine stocks -- that it can't really support a fund.

That concentration increased the fund's volatility. During the past 12 months, Pauze Tombstone lost nearly 65 percent of its value, making it one of the absolute worst of the 7,300-plus funds in the Lipper Inc. database.

If these funds were people, no one would show up here today to mourn them, but they might show up to make sure these bad actors really are dead. But these funds leave behind many survivors. Practically every day, some firm trots out a new focused or concentrated fund, or a sector fund that has sliced an industry too thin.

While fund families are killing off their weak offspring in the current market environment, new firms are stepping into the fray with offerings based as much on the hope of success as on past triumphs.

Those are dangerous places for investors to go when the market is going wild. Just as the stock market has seen something of a "flight to quality" with investors pursuing better-known, established stocks, so might the fund business.

"So many funds have short histories that people haven't had much to grab on to," says John Markese, president of the American Association of Individual Investors. "If the market continues as it has recently, people will want more than a story or a gimmick. They will want history and track record, one long enough to show them that the fund can be a success."

The deaths of the free fund and the death fund show that fund consumers might have reached that point. Consumers didn't fall for the stupid index-based idea, and they passed on the freebie because they could get better service for not much more money from established firms such as Vanguard.

Score these deaths a victory for the bedrock principles of fund investing: professional management and diversification.

Says Avi Nachmany of Strategic Insight, a New York-based firm that tracks fund activity: "You go to the amusement park and it's exciting for a while, but the novelty wears off after a while. Most people don't want to be amused with their retirement portfolio. If they keep that in mind, they'll make smart choices when picking funds, and more stupid ideas like these two will go away."

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, Mass., 02107-2378.

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