Passive in Name Only: Delegated Management and 'Index' Investing
63 Pages Posted: 24 Sep 2018 Last revised: 27 Nov 2018
Date Written: November 2018
This paper provides the first detailed empirical analysis of the landscape of US stock market indices. These indices are used both as benchmarks for US mutual funds and in the creation of “passive” index funds. I collect novel data that allows me to explore both of these functions. First, I hand collect detailed information about the universe of indices used as benchmarks for US mutual funds. I document substantial diversity across indices and find that the overwhelming majority of indices in my sample are used as a primary benchmark for only a single fund. I then turn to ETFs, a subset of the mutual fund industry, and hand collect detailed information about the index that each US ETF seeks to track. I find that a substantial fraction of these funds track indices that they, or their affiliates, create. Even controlling for other factors, I find that these funds have, on average, higher expense ratios. My findings shed light on a previously understudied part of the financial markets and have substantial implications for investor protection.
Keywords: stock market index, index investing, passive investing, mutual funds, ETFs, securities regulation
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