Funds that mirror the Standard & Poor's 500 index have been wildly popular with investors in recent years, but sticky pricing issues have stunted their sales through banks' retail brokerages.

Over the last year, though, at least two big banks have moved to expand their retail sales of the product by offering it as part of a mutual fund wrap program.

Wrap programs eliminate the up-front sales fees that banks often levy- charges that many investors are not willing to pay for index funds, which are widely available through no-load fund companies. In their place, banks reap an annual fee based on clients' total assets in a portfolio of mutual funds.

Bank executives say they do not expect a profit windfall from the new sales approach. Offering S&P 500 funds through wrap accounts just makes sense for customers looking to diversify their portfolios, they say.

"We believe that it should be part of people's overall portfolio," said Mark Beeson, a Banc One senior managing director who oversees the bank's proprietary funds. "It's actually just a complement."

But the approach clearly makes banks more competitive with the no-load companies as investors continue to pour money into S&P 500 funds.

It is unclear how successful selling the funds through wrap programs will be. Many bankers privately acknowledge that they will not include the index funds in their wrap programs because their management fees can be a fraction of those for actively managed funds.

To be sure, banks are no strangers to the index fund business. At least 19 run such funds, targeting them largely to the institutional retirement market and to trust customers and making their money through management fees.

Among the biggest players are Bankers Trust Corp., which manages more than $2 billion in S&P 500 fund assets, State Street Bank & Trust Co., which has $1.5 billion in assets, and U.S. Bancorp, with $930 million.

Joseph T. Keating, president of the money management arm of Old Kent Financial, in Grand Rapids, Mich., said companies that sponsor retirement plans for their employees often prod banks for specific products.

"If you want to be in a 401(k) program, you've got to have an index fund," said Mr. Keating, whose bank runs a $600 million S&P 500 fund.

A few-Banc One and KeyCorp among them-even flout conventional wisdom by selling index funds with a load.

Clients are willing to pay a load in return for the advice and service they get through the brokerage, said R. Edward Bowling, the senior vice president who manages Wachovia Corp.'s proprietary funds.

"We really haven't had a lot of folks who have scoffed at the idea of paying a sales charge," he said. "The self-service investor could and probably should go to a no-load family if they want to have an index fund."

But most banks have chosen not to compete with the no-load companies for retail sales because they would have to charge sales loads or lose money.

At the same time, many bank brokerage executives acknowledge that the products are a good fit for the typical bank investor, who fits a more conservative profile and gravitates toward less-volatile kinds of funds.

Those investors and others poured a net $21 billion into S&P 500 funds in 1997 as the market index turned in its third straight year of dazzling results.

Together, S&P 500 funds now house $137 billion of assets, with retail portfolios accounting for about 60% of that figure, according to Financial Research Corp., Boston.

They have fattened the coffers of no-load fund companies, led by Vanguard Group of Valley Forge, Pa., which has nearly $80 billion of assets in the fund category.

It is easy to see why the index funds are so popular.

By investing in the 500 blue-chip companies that make up the index, such funds have matched or outperformed the vast majority of actively managed general equity funds over the past few years.

Last year, for example, just 11% of actively managed general stock funds beat the index, which posted a total return of 33.35%.

And because the funds rarely buy and sell new stocks, they do not give rise to the tax consequences that actively managed funds do.

Sales of index funds through bank wrap programs appear to be modest so far. KeyCorp, which added its index fund to its wrap program in August, has amassed nearly $10 million of assets.

Banc One offers its proprietary index fund under its wrap program, which has $500 million of assets under management; the bank declined to say how much of that is through the wrap program.

Sales of S&P 500 funds at banks will depend largely on whether the index continues to turn in the kind of results it has over the past three years.

And the growth of index fund sales through the fee-based approach will also depend, of course, on the extent to which banks embrace mutual fund wrap programs.

For such growth to occur, "you need to believe this transition toward asset-based compensation is going to continue," said James Overholt, a consultant with Milliman & Robertson Inc., Chicago.

Wrap sales account for as much as 10% of mutual fund sales through banks, and some industry watchers say that figure could rise to 25% within five years.

Sales through wrap accounts, which typically entail annual fees of around 1% of assets, can be more lucrative over the long run than selling funds with loads, which are charged at the time of sale. But many bank brokerages are wary of taking the up-front revenue hit.

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