20 Index Fund Winners and Losers

If you needed any more proof that investors are bailing out of safe havens and back into riskier bets, look no farther than the first-half performance of index funds.

Index funds, which seek to replicate the performance of their underlying benchmarks, shine a light on what has become all-too apparent since the market started its remarkable 35% rally off its early March low: Emerging markets and growth stocks like technology and biotech are hot; Treasurys and value stocks are not. (Real estate investment trusts, or REITS, aren't so hot, either, but for different reasons that we touch upon below.)

Indeed, the top 10 performing index funds for the year to date through June 23 either track the Nasdaq-100, which consists of the 100 largest nonfinancial securities listed on the Nasdaq Stock Market, or emerging market benchmarks such as the MSCI Emerging Markets index, according to data provided by Morningstar.

If nothing else, the results are proof positive that an appetite for risk has returned with a vengeance, says Kevin Mahn, portfolio manager at Hennion & Walsh Asset Management. "Everyone from institutional investors to retail investors are anxious to rally right now," he says. "Everyone is chasing returns trying to make up for everything they lost in 2008."

Brazil, Russia, India and China (the so-called BRIC countries that form the keystone of emerging markets) have seen their broad equity markets produce an average total return of 47% year to date, according to Standard & Poor's Index Services. Little wonder then that Vanguard Emerging Markets Stock Index (VEIEX) and Northern Emerging Markets Equity (NOEMX) lead the winner pack, gaining 28% and 27%, respectively through Tuesday. (See table below.)

Coming in third is Amidex35 Israel (AMDEX), which tracks the 35 largest Israeli companies traded on Wall Street or in Tel Aviv. The fund gained 23% for the year through June 23. What's so special about Israel? It benefits from the fact that it is both an emerging market and has lots tech and other high-growth companies, says Aaron Katsman, chief executive of Lighthouse Capital in Jerusalem.

Looking at the laggards, the flight from safety is put into sharpest relief by the performance of Treasury bond index funds, especially those holding debt with long maturities.

Just take a look at Fidelity Spartan Long-Term Bond Index (FLBIX). It's off 13% year to date. Part of that decline is attributable to the fact that the longest-dated Treasurys returned more than 20% in 2008, meaning investors were willing to pay fat premiums for the government to safeguard their principal. The selloff has also been exacerbated by the so-called bond vigilantes -- traders who sell bonds in the belief that future inflation will force the Fed to raise rates. (Remember when interest rates rise, bond prices fall.)

Mahn, who oversees the SmartGrowth index funds among the year-to-date laggards, says they were hurt by their allocation to bonds, among other factors, as well as the fact that the underlying Lipper indexes are constructed to stay within a certain band of risk.

As for the REITs? They're being hurt by ongoing troubles in the credit and commercial real estate markets, says Morningstar analyst David Rodziewicz. "We're at the front end of declines for commercial real estate in general," he says. "The other issue is financing concerns. They're a highly levered business model with significant fixed costs, so they can't bring expenses down quickly."