Index Hugger

DEFINITION of 'Index Hugger'

A managed mutual fund that tends to perform much like a benchmark index such as the S&P 500, which gives it the reputation of being a "closet index fund."The majority of actively managed funds are expected to outperform the so-called average performance produced by passively managed index funds.

Also known as a "closet tracker" or "pseudo tracker".

BREAKING DOWN 'Index Hugger'

Investors pay fund investment managers higher fees to do better than index funds, although managers often fail to outperform the index.

A high R-squared factor, a mutual fund risk analysis measure, between 85 and 100 indicates that a managed fund's performance patterns are in line with the fund's benchmark index. If this is the case, investors may be better off investing in the index itself, which has lower portfolio turnover and lower expense ratio features.