The Rise of Passive Investing and Active Mutual Fund Skill

69 Pages Posted: 27 Nov 2023

See all articles by Da Huang

Da Huang

Northeastern University - D'Amore-McKim School of Business

Date Written: November 14, 2022

Abstract

How does passive investing affect active management? A simple model shows and the empirical results demonstrate that as passive investment rises, investors identify the skill of active managers faster, leading unskilled managers to exit the active mutual fund industry. Because unskilled active managers increase noise in stock prices, greater passive investing improves market efficiency as unskilled managers exit. These findings reconcile increasing closet indexing and fund homogenization, which could imply a lack of skill, with the literature that documents that skill exists in the active mutual fund industry.

Keywords: Passive investment, active investment, skill, market efficiency

JEL Classification: G11, G14, G20

Suggested Citation

Huang, Da, The Rise of Passive Investing and Active Mutual Fund Skill (November 14, 2022). Available at SSRN: https://ssrn.com/abstract=4190266 or http://dx.doi.org/10.2139/ssrn.4190266

Da Huang (Contact Author)

Northeastern University - D'Amore-McKim School of Business ( email )

Northeastern University
413B Hayden
Boston, MA 02215
United States

HOME PAGE: http://dahuang-finance.github.io

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