Closet Indexing

AAA

DEFINITION of 'Closet Indexing'

A portfolio strategy used by some portfolio managers to achieve returns similar to those of their benchmark index, without exactly replicating the index.

INVESTOPEDIA EXPLAINS 'Closet Indexing'

A portfolio manager practicing closet indexing might stick to an index in terms of weighting, industry sector or geography. A manager's performance is usually compared to that of his or her benchmark index, so there is an incentive for managers to gain returns that are at least similar to the index.

Closet indexing is often viewed negatively by investors because they could simply choose an index fund and pay lower fees. Not surprisingly, "closet" indexing is so named because these practices are often not publicly announced, but a close examination of a fund's prospectus can sometimes uncover which funds are practicing closet indexing. Watch for funds with high MERs and holdings that look quite similar to the fund's benchmark index.

RELATED TERMS
  1. Index

    A statistical measure of change in an economy or a securities ...
  2. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
  3. Indexing

    1. The adjustment of the weights of assets in an investment portfolio ...
  4. Portfolio Manager

    The person or persons responsible for investing a mutual, exchange-traded ...
  5. Prospectus

    A formal legal document, which is required by and filed with ...
  6. Return

    The gain or loss of a security in a particular period. The return ...
Related Articles
  1. Digging Deeper: The Mutual Fund Prospectus
    Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

  2. The Lowdown On Index Funds
    Options & Futures

    The Lowdown On Index Funds

  3. Index Investing
    Mutual Funds & ETFs

    Index Investing

  4. Choosing The Right ETF Index To Reach ...
    Investing News

    Choosing The Right ETF Index To Reach ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center