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Enhanced index funds should be in the best position to at least modestly outperform index funds. All a fund manager has to do is stick to the majority of stocks in an index and then overweight a small number to try to eke out enhanced returns. And in principle this should keep the risk profile of the resulting portfolio similar to the underlying index.
In practice it is not so easy. According to Morningstar Inc., over the last 3 years enhanced funds have trailed their targeted indexes by about 2.5% annually over the last 3 years.
High management fees appears to be a major factor. In an article in the Wall St. Journal on Friday, March 26, on the subject, a financial planner who studied enhanced funds was quoted as saying that at 1.1% management fees for enhanced index funds are twice that of regular index funds at .54%. (See www.wsj.com, which requires a fee to view).
Many of the funds track the S&P 500 as their core target. The continued strength of the largest firms in this index has befuddled many investment analysts in recent years.