Enhanced indexing

In finance, enhanced indexing is a catch-all term that describes strategies employed to outperform traditional indexing. Enhanced indexing attempts to generate modest excess returns compared to index funds and other passive management techniques.

Features

Enhanced indexing combines elements of passive management and active management.

Enhanced indexing resembles passive management because enhanced index managers cannot (in principle) deviate significantly from commercially available indices which are derived from statistical bureaus like Standard & Poor's or The Frank Russell Company. Enhanced indexing strategies have low turnover and lower fees than actively managed portfolios.

However, enhanced indexing also to a certain extent resembles active management because it allows managers the latitude to certain deviations from underlying index. These deviations can be used to minimize transaction costs and turnover, or to maximize tax efficiency.

Strategies

Enhanced indexing comprises a wide range of strategies:

Performance

The success of enhanced indexing is likely correlated to the degree of extra cost running an enhanced index fund. Tax-managed strategies are not expensive to implement, while the active management strategies would incur a higher cost structure.

See also

References

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