Enhanced Indexing

DEFINITION of 'Enhanced Indexing'

An investment philosophy that attempts to amplify the returns of an underlying portfolio or index fund while also minimizing the effects of tracking error. This type of investing is considered a hybrid between active and passive management and is used to describe any strategy that is used in conjunction with index funds for the purpose of outperforming a specific benchmark.

BREAKING DOWN 'Enhanced Indexing'

For example, an investor can short sell poor performing stocks from an index and then use the funds to purchase shares of companies they expect will have high returns. Investors can substantially outperform a benchmark over long time horizons by consistently eliminating their exposure to poor performing stocks and by using the proceeds to invest in other securities.