Closet Active Management of Passive Funds

Ostensibly passive index funds and ETFs are surprisingly active. A third of these funds exhibit more activeness than the median actively managed fund, as measured by conventional proxies. Using hand-collected prospectus data, we find that "passive" funds offer an increasingly wide assortment of styles and provide more extreme factor exposures than active funds. We also identify a new dimension of activeness: the use of an index that is explicitly proprietary to the index fund or ETF. In contrast with actively managed funds, more active index funds and ETFs---"closet activists"---underperform. A one-standard deviation increase in activeness is associated with a 55 basis-point decrease in annual alpha. Our results point to the increasingly blurred line between "active" and "passive" funds.