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. Prospectus

    A formal legal document, which is required by and filed with ...
  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 FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What are some of the best small cap index funds?

    The best small-cap index funds are the iShares Russell 2000 ETF (IWM), SPDR S&P 600 Small Cap ETF (SLY), Vanguard Russell ... Read Full Answer >>
  5. What are some index funds that specialize in blue chip stocks?

    Some index funds that specialize in blue-chip stocks are the Fidelity Blue Chip 35 Index Fund (BRLIX), Vanguard Dividend ... Read Full Answer >>
  6. What is index option trading and how does it work?

    Index options are financial derivatives based on stock indices such as the S&P 500 or the Dow Jones Industrial Average. ... Read Full Answer >>
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. 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.
  5. 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.
  6. Professionals

    Should Investors Nix Actively Managed Funds?

    Index fund returns are on a tear but does this mean investors should nix actively managed funds?
  7. 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.
  8. 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.
  9. 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.
  10. Chart Advisor

    ChartAdvisor for February 13 2015

    A weekly technical summary of the major U.S. indexes.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center