Index funds and avoiding the generics paradox

Author: James Saft

Cremers

Active investors are the hidden beneficiaries of the rise of index funds.

Regardless of whether you believe in the value of active asset management, a new study of the global experience shows that the growth of index funds tends to make active funds more truly active and better performers.

Looking at data from 32 countries from 2002 to 2010, the study found that as index funds become more widespread, active funds raise their game.

“It suggests that active funds perform better in markets where low-cost, explicitly indexed funds are more available. This finding is consistent with the idea that enhanced competition by low-cost explicitly indexed funds spurs active funds to deliver better after-fee performance to investors,” Martijn Cremers of the University of Notre Dame, Miguel Ferreira of the Nova School of Business and Economics, Pedro Matos of the University of Virginia and Laura Starks of the University of Texas wrote in a Feb. 1 paper.

Read the entire article on the Reuters website.