Indexing pressure improves active management

A new study of active and indexed-based mutual funds shows the impact of different countries’ regulatory and financial market environments.

The study finds that the average alpha generated by active management is higher in countries with more explicit indexing and lower in countries with more closet indexing. The evidence suggests that explicit indexing improves competition in the mutual fund industry.

The study find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds.

A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results.

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