Enhanced index fund

Enhanced index fund. An enhanced index fund chooses selectively among the stocks in a particular index in order to produce a slightly higher return. By contrast, an index fund strives to mirror the performance of a particular index by owning all the stocks in the index.

The goal is to narrowly beat the index anywhere from a fraction of a percent to two percentage points, but not more. A wider spread would classify the enhanced fund as an actively managed mutual fund rather than an index fund.

Enhanced index fund managers may achieve higher returns by identifying the undervalued stocks in the index. Or they might adjust holdings to include a larger proportion of securities in higher performing sectors, or use other investment strategies, such as buying derivatives.

While enhanced index funds may expose you to the risk of greater losses than their plain-vanilla counterparts, they may also offer an opportunity for higher returns.