Incomplete Investor Search: Low-expense Index Funds and Fund Flows in a Fund Family

Abstract

This paper shows that low-expense index funds draw investor attention to a fund family, and the investors' subsequent incomplete search within funds in the family raises flows of actively managed funds in the same family by 10%. These spillover effects are more salient among retail investors and share classes with a direct distribution channel. At the family level, offering low-expense index funds positively influences aggregated flows. Fund families strategically increase the expense ratios of actively managed funds after introducing low-expense index funds.