Indexing and Active Fund Management: International Evidence
University of Notre Dame
Miguel A. Ferreira
Nova School of Business and Economics; European Corporate Governance Institute (ECGI)
Pedro P. Matos
University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)
Laura T. Starks
University of Texas at Austin - Department of Finance
January 5, 2015
We examine the relation between indexing and active management in the mutual fund industry worldwide. Explicit indexing and closet indexing by active funds are associated with countries’ regulatory and financial market environments. We find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results. Moreover, the average alpha generated by active management is higher in countries with more explicit indexing and lower in countries with more closet indexing. Overall, our evidence suggests that explicit indexing improves competition in the mutual fund industry.
Number of Pages in PDF File: 73
Keywords: Mutual funds, Active management, Index funds, Exchange-traded funds, Competition, Fees, Performance
JEL Classification: G15, G18, G23
Date posted: May 3, 2011 ; Last revised: January 6, 2015
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