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. Indexing

    1. The adjustment of the weights of assets in an investment portfolio ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a ...
  4. Portfolio Manager

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

    A standard against which the performance of a security, mutual ...
  6. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
Related Articles
  1. Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  2. Options & Futures

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  3. Mutual Funds & ETFs

    Index Investing

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

    Should Investors Nix Actively Managed Funds?

    Index fund returns are on a tear but does this mean investors should nix actively managed funds?
  5. Mutual Funds & ETFs

    ETF Bubble Or No Bubble?

    ETFs might be the recommendation of choice for the unimaginative financial advisor, but that doesn’t mean that the industry is in a bubble.
  6. Investing

    Active Funds: Getting What You Are Paying For?

    Fund investing could have hidden costs that can potentially make a big impact on your final return, particularly over the long-term.
  7. Trading Strategies

    A Legendary Market Skill Experience Traders Have

    Tape readers interpret complex background data during the market day to gain a definable trading edge over the competition.
  8. Chart Advisor

    ChartAdvisor for February 13 2015

    A weekly technical summary of the major U.S. indexes.
  9. Mutual Funds & ETFs

    Tired Of Mutual Funds? Try This Alternative

    Mirrored investments services are a beneficial alternative to traditional mutual funds. Discover how they work and how they can be used to your advantage.
  10. Technical Indicators

    Break Down Modern Market Trends To Grasp Movement

    Convergence points to dynamic conditions that can elicit strong trends while divergence suggests conflict, more typical of rangebound price action.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center