The Rise of Passive Investing and Active Mutual Fund Skill

67 Pages Posted: 27 Nov 2023 Last revised: 9 Jun 2024

See all articles by Da Huang

Da Huang

Northeastern University - D'Amore-McKim School of Business

Date Written: June 08, 2024

Abstract

This paper shows that the rise of passive investing makes the active mutual fund industry more skilled. Greater passive investing makes it easier for active funds to outperform the benchmark and accelerates the exit of underperforming funds. In response, skilled managers take less risk to outperform more consistently. Since unskilled active managers introduce noise into stock prices, accelerating their exit improves market efficiency. These findings reconcile the rise of passive investing, closet indexing, and fund homogenization, which may imply a lack of skill, with the literature documenting the presence of skills 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 (June 08, 2024). 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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