The index tracking strategies of passive and enhanced index equity funds

Australian Graduate School of Management
Publication Type:
Journal Article
Australian Journal of Management, 2005, 30 (1), pp. 23 - 55
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This study represents the first empirical examination of the daily trading and portfolio configuration strategies of index and enhanced index equity funds. We document that passive funds benefit from employing less rigid rebalancing and investment strategies. During index revision periods, enhanced index funds commence portfolio rebalancing earlier than index funds, and employ more patient trading strategies. This activity translates into higher returns and lower trading costs for enhanced index funds. In cases where passive funds do not perfectly mimic the benchmark, passive funds exhibit a greater propensity to overweight stocks with higher liquidity, larger market capitalization and higher past performance. For nonindex portfolio holdings, enhanced funds exhibit a higher propensity to hold 'winners' and sell 'losers'.
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