Active Index Fund

AAA

DEFINITION of 'Active Index Fund'

A type of index fund where a fund manager bases the fund's initial investment proportions according to the benchmark index in which the manager is attempting to track, and then proceeds to add what he/she believes to be higher performing stocks that are unrelated to underlying index. The fund manager will then actively manage the composition of these non-benchmark stocks in order to earn yields that exceed the benchmark index.

INVESTOPEDIA EXPLAINS 'Active Index Fund'

A fund manager that attempts to make an active index fund version of the Standard & Poor's 500 Index (S&P 500) would buy and periodically rebalance all the stocks to match the proportions found in the actual S&P 500. In addition, the manager will add stocks they believe will have a strong performance. For example, if the manager believes that the semiconductors will be hot during the subsequent quarter; more semiconductor stocks would be added to the portfolio.

While it is possible that some fund managers may be able to significantly beat the underlying benchmark index by using strategies, such as market timing, this is far from guaranteed. Furthermore, the active management aspect of the fund will likely incur higher expenses, which could eat away at some and perhaps all of the extra returns earned by active management.

RELATED TERMS
  1. Enhanced Index Fund - EIF

    A mutual fund that tracks a stock market index, but with certain ...
  2. Expense Ratio

    A measure of what it costs an investment company to operate a ...
  3. Active Management

    The use of a human element, such as a single manager, co-managers ...
  4. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
  5. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
  6. Next Generation Fixed Income (NGFI) ...

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
RELATED FAQS
  1. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Calculate the tracking error of an indexed exchange-trade fund (ETF) or mutual fund by doing a standard deviation percentage ... Read Full Answer >>
  2. How do you calculate the excess return of an ETF or indexed mutual fund?

    For exchange-traded funds (ETFs), the excess return should be equal to the risk-adjusted (or beta) measure that exceeds the ... Read Full Answer >>
  3. Which commodities are the main input materials for the chemicals sector?

    Some of the most well-known no-load funds are the DoubleLine Total Return Bond Fund (DLTNX), Vanguard Short-Term Investment-Grade ... Read Full Answer >>
  4. How does beta measure a stock's market risk?

    Beta is a statistical measure of the volatility of a stock versus the overall market. It's generally used as both a measure ... Read Full Answer >>
  5. What is the average annual return for the S&P 500?

    According to historical records, the average annual return for the S&P 500 since its inception in 1928 through 2014 is ... Read Full Answer >>
  6. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The Differences

    If you are trying to choose between these two index-tracking investments, compare the costs.
  2. Mutual Funds & ETFs

    Active Vs. Passive ETF Investing

    You can use these securities for more than just indexing. Explore the spectrum of possible ETF strategies.
  3. Mutual Funds & ETFs

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
  4. Mutual Funds & ETFs

    Index Investing

    Get to know the most important market indices and the pros and cons of investing in them.
  5. Investing

    Which Dow Jones Stocks are Safe? Which are Risky?

    In a situation where our sustained bull run could turn into a sell-off rather quickly, here are four somewhat safe Dow stocks and four to be wary of.
  6. Professionals

    5 Signs That You Have a Lousy 401(k) Plan

    Knowing whether a 401(k) plan is good or not so good is important. This will help participants decide how much to invest and when to demand improvements.
  7. Chart Advisor

    ChartAdvisor for May 1 2015

    A weekly technical summary of the major U.S. indexes.
  8. Options & Futures

    Key Factors Of The Russell 2000 Index

    The Russell 2000 index represents the small cap universe, with a broad selection of fast growth companies at the bottom end of the capitalization spectrum.
  9. Active Trading Fundamentals

    Where And How Should You Make Your First Trade?

    New traders should enter markets that offer the greatest opportunity for learning their craft while keeping risk at a minimum.
  10. Professionals

    Should Investors Nix Actively Managed Funds?

    Index fund returns are on a tear but does this mean investors should nix actively managed funds?

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center