"Funds that change their benchmarks often are really not so different from active managers." (Getty Images)

Index-oriented investors strike a bargain: They'll settle for returns that merely match the market in exchange for low fees that boost profits over time. They go on autopilot, tracking an underlying benchmark like the Standard & Poor's 500 index, and give up the chance of beating the market for the assurance they won't fall behind it.

Many studies show this has worked well, with indexed products generally beating actively managed funds and providing peace of mind – and gaining enormous popularity. But occasionally a fund company will throw a curve, changing the benchmark index that determines which stocks or bonds the fund owns. What's the investor to do then?

S. Michael Sury, lecturer in finance at the University of Texas at Austin, says investors should look carefully at the fund firm's reasoning. If it's switching to a benchmark that better suits the fund's goals, fine. If the change, or series of changes, is a reach for better performance, that's a kind of active management by stealth, and that's not OK.

"Funds that change their benchmarks often are really not so different from active managers," Sury says.

"As the number of index funds have continued to grow, there has been a land-grab for assets," he adds. "Fund managers have felt the need to differentiate themselves from the rest of the pack. As a result, some fund families have developed their own benchmarks, and active management of a different form has begun to creep back in."

Index funds have been around since the '70s, and have exploded in recent years as more investors and institutions are swayed by evidence that active managers, for all their analysis and rapid-fire buying and selling, have a tough time matching the gains of the broad market or market segment they are following. Meanwhile, index funds that merely buy and hold stocks or bonds in the underlying benchmark, can virtually guarantee market-matching gains with little loss to expenses, since they don't need all those market analysts and stock pickers.

But despite the fund company's best intentions, the fund may find the index it has used no longer tracks the intended market sector well enough, prompting a change that can benefit investors, says Erika Jensen, president of Respire Wealth Management in Houston.

"If a fund is meant to capture a specific index, sector, or other measured portion of the market but diverges widely from the benchmark, then both the fund family and outside investment managers will ask why is this divergence or drift occurring," she says. "If I intend to have intermediate-term U.S.Treasurys in my portfolio, but it turns out that I actually have a lot of agencies and an assortment of durations causing drift or divergence, and potentially some interest rate or reinvestment risk, then I am not going to be happy with how that puzzle piece fit into my portfolio."

Index funds, though designed for hands-off investing, are not completely free of human judgment. From time to time, the firms that manage the indexes themselves tinker with the components. The list of 30 stocks in the Dow Jones industrial average is changed occasionally, and even the vaunted S&P 500 changes. It is composed of the 500 largest U.S. stocks, measured by market capitalization, or share price times number of shares outstanding, so the membership changes as the list of biggest stocks evolves.

A mutual fund or exchange-traded fund tracking one of these major indexes will change its portfolio to mirror changes in the benchmark. That's generally not a problem for investors if the index remains faithful to its goal of representing a certain segment of the market.

But experts say it can be a red flag if the fund firm makes significant changes to an in-house benchmark – a kind of subtle active management that lets fund managers interfere with the basic autopilot feature of indexing.

So the first question for the investor, Sury says: Are changes in fund components governed by in-house decisions, or merely reacting to adjustments by a third party that controls the index?

"Investors should be wary of fund families that use their own proprietary benchmarks, unless that is explicitly what an investor is seeking," Sury says.

In other cases, a fund company switches from one index to another.

Vanguard Group, the index fund giant, recently announced benchmark changes for three exchange-traded bond funds. All these changes moved from one Bloomberg Barclays benchmark to another, shifts designed to narrow the focus from general government bonds to U.S. Treasury bonds. Because the Treasury market is huge, the move will reduce differences between bid and asked prices for bonds in the funds, Vanguard said. That should reduce costs passed to investors, but experts urge investors to look closely at the fund company's rationale.

"When an index fund manager changes the benchmark, an investor should examine the differences between the old and new benchmarks and scrutinize the fund's decision to make the change," Sury says. "If the explanation is arcane, investors should consult an experienced financial advisor. Investors would be wise to consider those funds [and fund families] that follow unaffiliated benchmark providers [such as] Standard & Poor's."

As with any other significant change in one's holdings, a benchmark shift should spur a reassessment of the investor's overall plan, asset allocation and choices among each asset class.

"It's a common misconception that index funds are a forget-it vehicle," says Nicholas Tilli, wealth advisor with BerganKDV in Bloomington, Minnesota. "But just like a manager change in your active fund you'd want to look into these changes and make sure they align with your objectives for that asset class."

Bernie Nelson, president for North America of Style Research, a portfolio analytics firm with U.S. offices based in Boston, urges investors dealing with benchmark changes to keep an eye on things rather than make a one-time decision to stick with the fund or sell it.

"The changes are not always immediately obvious," he says. "Sometimes sector and country weights can change significantly and, of course, some stocks may exit while others enter. But style factors may also differ, such as a size bias change to smaller companies, or a value or quality shift. Looking at the names of the old and new indices can sometimes provide an illusion of similarity. You simply don't know until you measure."