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Finance: What is Closet Indexing? 0 Views
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Description:
What is Closet Indexing? In the mutual fund arena, funds are usually active, meaning there is a highly paid fund manager calling the shots, or passive, meaning that the fund is essentially mirroring an particular index albeit on a prorated, smaller scale. The latter, as one would conclude, has cheaper fees. Closet Indexing occurs when an active fund’s portfolio essentially mirrors the portfolio composition and performance of an index, but at a higher fee than that of a passive fund.
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Transcript
- 00:00
Finance a la shmoop what is closet indexing? shirts here shoes there
- 00:08
panties um sorry what's that doing there [Man holding a pair of panties]
- 00:11
underwear...those aren't mine really okay it's not referring to a
- 00:16
literal closet, closet indexing is a financial strategy that professional
- 00:21
investment managers aren't all that proud to be doing hence they keep their
Full Transcript
- 00:25
activities in the closet and it's you know like this guy yeah if that's one of [Man appears behind rack of shirts]
- 00:30
them closet index are you.. most investment managers performance is
- 00:33
pegged to a given investment index like the S&P 500 or the Russell 2000 or the
- 00:40
30-year US government paper so if a manager was indexing to the Dow Jones
- 00:45
average well, they'd note the 30 stocks in it like
- 00:49
these...... and their closet [List of Dow 30 stocks]
- 00:56
indexed portfolio would just riff off the stocks in the rough weighting
- 01:01
amounts that comprise the Dow like here's Microsoft but they might have in
- 01:05
their portfolio a tenth of a percent more in Microsoft than is in the Dow
- 01:09
index because they are slightly less bearish about the future prospects of
- 01:14
the once-great company you know then the rest of the street has and they might [People purchasing stocks]
- 01:19
have a bit less oil because well they drive a Tesla and they think everyone
- 01:23
well they just should and by keeping their portfolio very close to their
- 01:28
index well they're never heroes they're never goats, they just keep their jobs
- 01:32
going along collecting their salaries and they live to you know dress another
- 01:37
day... [Girl trying on clothes and man walks by]
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