It's a rotten bear market. The S&P 500 Index has been trailing managed money big time. We all know that because those who make their living by managing money or selling money managers tell us as often as possible.

So. Maybe this is a good time to see how variable annuities, with all their expenses, fare against the homely index fund when managed money is on top. Maybe now, a simple, low-cost, tax efficient index fund won't do better than all but a handful of variable annuity sub-accounts. Maybe now I can produce some numbers variable annuity salesman will want to Xerox instead of suppress.

The executive summary: keep holding your breath; the index is still a better deal.

According to the Morningstar Principia database there are 178 variable annuity sub-accounts with 15-year histories that invest in domestic equities. That's the field we'll measure since it is widely agreed that variable annuities don't make sense unless you are a long-term investor. Here's how they compared over the last three, five, ten, and fifteen years:

Three years. Over the last three years, the average return in the variable annuity funds was an annualized loss of 10.08 percent. This compares favorably with the 10.87 percent annualized loss, before taxes, of the Vanguard 500 Index fund. This shows in the rankings--- the index fund ranked 85th against the 178. I take that as clear evidence that the managed funds have done better in recent years.

Unfortunately, there's no benefit for superior performance. Why?   Because investors in the variable annuity now have tax-deferred losses instead of tax deferred gains. Worse, if they decide to bail out they face penalties that have to be paid to the insurance company.

Five years. Go back five years and the index fund is slightly superior. It provides an annualized pre-tax return of 0.42 percent compared to the annualized 1.52 percent loss of the average variable annuity domestic equity account. The index ranked 59th of 178, beating two out of three of the managed variable annuity accounts. Worse, if you were discouraged and wanted to bail out, you'd still have a penalty to pay the insurance company.

Ten years. Look back ten years and the bear market for index investing is over. The Vanguard 500 Index provided a pretax return of 10.01 percent while the variable annuity sub-accounts averaged 7.07 percent, before taxes. The index fund would have ranked 15th among the 178 funds. Before and after taxes, the index beat the funds cold.

Fifteen years. Finally, there is the fifteen-year performance. We will measure this in three different ways. If no taxes had been paid along the way, the Vanguard 500 Index fund would have ranked 12th among the 178 sub-accounts with a pre-tax return of 9.75 percent a year.

After paying taxes on dividends and capital gains distributions along the way, the return declines to 8.83 percent. That lowers the ranking to 18th.

Having paid taxes along the way, however, doesn't mean that all taxes have been paid. The index fund has substantial unrealized capital gains just as the variable annuity sub-accounts have years of tax-deferred returns. If the investment is liquidated and the unrealized capital gains taxes are paid the net return falls to 8.10 percent. This is the equivalent of a pre-tax return of 11.14 percent for a variable annuity sub-account since all gain is taxed at an assumed 31 percent.

So the homely index fund, after all taxes are paid, would have ranked 10th against 178 managed contenders.

The bottom line, once again, is that variable annuities have no reason to live. If you want to limit risk and defer income, the expenses of a variable annuity are too high for fixed income investing. Most people would do better with a simple iSavings Bond purchase.

If you are want to take risk and defer taxes you can do that at much lower expense with the purchase of a low-cost, tax-efficient index fund or Exchange Traded Fund.