Articlebronze2014

Passive versus Active Fund Performance: Do Index Funds Have Skill?

85 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Abstract

We apply methods designed to measure mutual fund skill to a cross-section of traded funds that should not exhibit managerial portfolio selection skill: index funds. Surprisingly, these tests imply index fund skill exists, is persistent, and is in similar proportion as in active funds. We use the distribution of passive fund performance to gauge incremental ability of active managers. Outperformance by top active funds is lower when benchmarked to the index fund distribution and disappears when we account for residual risk. Stochastic dominance tests suggest no risk-averse investor should choose a random active fund over a random index fund.

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References

1993Common risk factors in the returns on stocks and bonds 1997On Persistence in Mutual Fund Performance 1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964 1998Costly Search and Mutual Fund Flows 1997Measuring Mutual Fund Performance with Characteristic‐Based Benchmarks 1997Risk Taking by Mutual Funds as a Response to Incentives 1996Another Puzzle: The Growth in Actively Managed Mutual Funds 2004Mutual Fund Flows and Performance in Rational Markets

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