The Mutual Fund Industry Worldwide: Explicit and Closet Indexing, Fees, and Performance

We examine the causes and consequences of indexing for active management by equity mutual funds worldwide. Explicit indexing is rare in countries with weaker regulation and less liquid stock markets, but many actively managed funds engage in closet indexing. We find that funds are more active and charge lower fees when they face more competitive pressure from explicitly indexed funds. Moreover, truly active funds generate higher risk-adjusted net returns than closet indexers. Overall, we conclude that explicit indexing improves the levels of competition and efficiency of the mutual fund industry in a country.