16 Pages Posted: 25 Apr 2012
Date Written: January 15, 2006
Enhanced indexing is sometimes proposed as an alternative to traditional active or passive management; sometimes it is described as something between the two. Enhanced index managers are said to make small and careful bets relative to an index — not “swinging for the fences” but rather aiming for modest, consistent value added. Less often is evidence given that the benefits of enhanced indexing are real. This examination of the case for enhanced indexing explains its rationale. A study of a survivorship bias-free database of mutual funds reveals no empirical evidence that low active risk strategies perform particularly better than any others. We recommend clients approach enhanced indexing the same way they do any other active strategy, and pay particular attention to fees relative to the level of active risk.
Keywords: enhanced indexing, active management, mutual funds, fees
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