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Index investing: passive in name only

Index investing: passive in name only

18-12-2019 | From the field
Not all index-based products are alike. This paper 1 provides a detailed empirical analysis of the landscape of US stock market indices. Using hand-collected information about indices used as benchmarks for US mutual funds, the author finds substantial heterogeneity across indices. Moreover, the overwhelming majority of indices turn out to be used as a primary benchmark by only a single fund.
  • David Blitz
    David
    Blitz
    Head of Quant Research

The author then turns to ‘passive’ index funds and finds that both these phenomena are even more extreme among the indices tracked by these funds. She argues that far from being ‘passive’, index investing is better understood as a form of delegated active management, where the delegee is the index creator rather than the fund manager. Many ETFs are found to track indices that they or their affiliates create. Even controlling for other factors, these funds have, on average, higher expense ratios.

1 Robertson, A.Z., 2019, ‘Passive in Name Only: Delegated Management and ‘Index’ Investing’, Yale Journal on Regulation.

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