Passive versus Active Fund Performance: Do Index Funds Have Skill?

56 Pages Posted: 18 Jul 2014 Last revised: 18 Aug 2017

See all articles by Alan D. Crane

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

Kevin Crotty

Rice University - Jesse H. Jones Graduate School of Business

Date Written: March 22, 2016

Abstract

We apply methods designed to measure mutual fund skill to a cross-section of traded funds that should not exhibit managerial portfolio selection skill: index funds. Surprisingly, these tests imply index fund skill exists, is persistent, and is in similar proportion as in active funds. We use the distribution of passive fund performance to gauge incremental ability of active managers. Outperformance by top active funds is lower when benchmarked to the index fund distribution and disappears when we account for residual risk. Stochastic dominance tests suggest no risk-averse investor should choose a random active fund over a random index fund.

Keywords: Index Funds, Mutual Fund Performance, Skill

JEL Classification: G11, G2, G23

Suggested Citation

Crane, Alan D. and Crotty, Kevin, Passive versus Active Fund Performance: Do Index Funds Have Skill? (March 22, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2467102 or http://dx.doi.org/10.2139/ssrn.2467102

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Kevin Crotty (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 Main Street
Houston, TX 77005-1892
United States

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