Passive versus Active Fund Performance: Do Index Funds Have Skill?
56 Pages Posted: 18 Jul 2014 Last revised: 18 Aug 2017
Date Written: March 22, 2016
We apply methods designed to measure mutual fund skill to a cross-section of traded funds that should not exhibit managerial portfolio selection skill: index funds. Surprisingly, these tests imply index fund skill exists, is persistent, and is in similar proportion as in active funds. We use the distribution of passive fund performance to gauge incremental ability of active managers. Outperformance by top active funds is lower when benchmarked to the index fund distribution and disappears when we account for residual risk. Stochastic dominance tests suggest no risk-averse investor should choose a random active fund over a random index fund.
Keywords: Index Funds, Mutual Fund Performance, Skill
JEL Classification: G11, G2, G23
Suggested Citation: Suggested Citation