The Growth of Passive Indexing and Smart-Beta: Competitive Effects on Actively Managed Funds

Abstract

I investigate the extent to which competition from index funds affects fees, performance, manager turnover, and survival rates of actively managed US equity mutual funds. Disentangling the competitive effects of traditional index funds (market index) from smart-beta index funds (factor index), I show that factor index fund competition has had a negative impact on actively managed net fees, performance and management team size. In contrast, market index fund competition insignificantly affects these outcomes. I further document a negative relation between active incumbent survival rates and both factor and market index fund competition and find that this effect is most pronounced for relatively expensive active incumbents.

Keywords: Mutual Funds, Competition, Index Funds, Smart-beta, Fees, Attrition.

JEL Classification: G11, G12.