Closet Indexing

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.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center