Why Can’t Investors Pick the Right Index Fund?

42 Pages Posted: 14 Dec 2021

See all articles by Ricardo Barahona

Ricardo Barahona

Banco de España; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: November 1, 2020

Abstract

Investors leave large amounts of money on the table when investing in index funds, a popular investment product that accounts for 40% of equity funds. I show that even though high fees strongly predict poor performance, investors have little sensitivity to fees. This can be explained by fund intermediation in the retail sector and the legal standard of care that intermediaries have towards their clients. Net inflows to high-fee funds are higher when brokers and financial advisors receive sales commissions from the investment management company. When funds are sold through intermediaries held to higher standard of care, such as those sold to employer sponsored defined contribution pension plans, this is no longer the case. Together, this evidence suggests imposing fiduciary duties on fund intermediaries improves investor welfare.

Keywords: Index Funds, Mutual Funds

JEL Classification: G23

Suggested Citation

Barahona, Ricardo, Why Can’t Investors Pick the Right Index Fund? (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3981797 or http://dx.doi.org/10.2139/ssrn.3981797

Ricardo Barahona (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands

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