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Applied Economics Letters Volume 17, 2010 - Issue 10
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Original Articles

Index funds should be expected to underperform the index

Michael Hanke Department of Banking and Finance, University of Innsbruck, Universitätsstr., 15, Innsbruck, A-6020, Austria
&
Klaus Schredelseker Department of Banking and Finance, University of Innsbruck, Universitätsstr., 15, Innsbruck, A-6020, AustriaCorrespondence[email protected]
Pages 991-994 | Published online: 13 May 2009
 
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Abstract

A widespread belief is that index funds should earn the index return. We argue that this would lead to a serious paradox. In our model, we analyse the effects of an increasing number of investors switching from active to passive investment.

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