Closet Index fund?

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BogleAlltheWay
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Closet Index fund?

Post by BogleAlltheWay »

Hi all,

If a active fund has an r-squared of .98 compared to the S&P 500 TR USD, does that mean it is a closet S&P 500 index fund?
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Re: Closet Index fund?

Post by barnaclebob »

I think the more important metric would be a comparison r squared and the total returns. Theoretically the active fund could have exactly double the movement of the S&P 500 and have a r squared of 1. At least I think that might be true.
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Re: Closet Index fund?

Post by BogleAlltheWay »

barnaclebob wrote:I think the more important metric would be a comparison r squared and the total returns. Theoretically the active fund could have exactly double the movement of the S&P 500 and have a r squared of 1. At least I think that might be true.
The total returns have been 1% less than the S&P 500 TR.
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Re: Closet Index fund?

Post by David Jay »

BogleAlltheWay wrote:
barnaclebob wrote:I think the more important metric would be a comparison r squared and the total returns. Theoretically the active fund could have exactly double the movement of the S&P 500 and have a r squared of 1. At least I think that might be true.
The total returns have been 1% less than the S&P 500 TR.
And what is the ER?
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Re: Closet Index fund?

Post by BogleAlltheWay »

David Jay wrote:
BogleAlltheWay wrote:
barnaclebob wrote:I think the more important metric would be a comparison r squared and the total returns. Theoretically the active fund could have exactly double the movement of the S&P 500 and have a r squared of 1. At least I think that might be true.
The total returns have been 1% less than the S&P 500 TR.
And what is the ER?
~.95
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Re: Closet Index fund?

Post by David Jay »

BogleAlltheWay wrote:
David Jay wrote:
BogleAlltheWay wrote:
barnaclebob wrote:I think the more important metric would be a comparison r squared and the total returns. Theoretically the active fund could have exactly double the movement of the S&P 500 and have a r squared of 1. At least I think that might be true.
The total returns have been 1% less than the S&P 500 TR.
And what is the ER?
~.95
Nice...
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Re: Closet Index fund?

Post by BogleAlltheWay »

Does that mean it is essentially tracking the index?
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Re: Closet Index fund?

Post by barnaclebob »

BogleAlltheWay wrote:Does that mean it is essentially tracking the index?
Yes except for the fact that the managers are taking .95% of the NAV to do what vanguard can do for ~.05%

What fund are you talking about though?
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Re: Closet Index fund?

Post by BogleAlltheWay »

barnaclebob wrote:
BogleAlltheWay wrote:Does that mean it is essentially tracking the index?
Yes except for the fact that the managers are taking 1% of the returns to do what vanguard can do for ~.05%

What fund are you talking about though?
Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX


I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
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Re: Closet Index fund?

Post by barnaclebob »

Yep, pretty safe to say that this is a closet index fund where the managers so far have been paid for nothing:

http://www.morningstar.com/funds/xnas/retsx/quote.html
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Re: Closet Index fund?

Post by inbox788 »

BogleAlltheWay wrote:Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX


I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
Any benefits to the "Tax-Managed"? Probably not worth the large expense, but if they were equal expense/cost, is there any benefit or are you still better off with the index? And how do they tax-manage?
Last edited by inbox788 on Wed Jun 21, 2017 2:08 pm, edited 2 times in total.
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Re: Closet Index fund?

Post by BogleAlltheWay »

barnaclebob wrote:Yep, pretty safe to say that this is a closet index fund where the managers so far have been paid for nothing:

http://www.morningstar.com/funds/xnas/retsx/quote.html
If this was a true active fund, how could I tell?
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Re: Closet Index fund?

Post by BogleAlltheWay »

inbox788 wrote:
BogleAlltheWay wrote:Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX


I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
Any benefits to the "Tax-Managed"? Probably not worth the large expense, but if they were equal expense/cost, is there still a benefit or are you still better off with the index?
It is more tax efficient than an S&p 500 fund but only by .30% or so.
That doesn't even include the advisory fee so I have no doubt that the index fund is way better.
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Re: Closet Index fund?

Post by The Wizard »

inbox788 wrote:
BogleAlltheWay wrote:Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX


I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
Any benefits to the "Tax-Managed"? Probably not worth the large expense, but if they were equal expense/cost, is there any benefit or are you still better off with the index? And how do they tax-manage?
They tax-manage by not selling any holdings and thus never having capital gains to distribute.
This happens practically by definition with a total market index fund and probably with an S&P 500 index fund also.
Now the S&P 500 adds and removes companies on a regular basis as valuations change. The companies which are removed from the S&P 500 get sold the next week by those index funds, but I'm guessing many of them get sold for a loss, so no CGs to distribute...
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Re: Closet Index fund?

Post by David Jay »

BogleAlltheWay wrote:
barnaclebob wrote:Yep, pretty safe to say that this is a closet index fund where the managers so far have been paid for nothing:

http://www.morningstar.com/funds/xnas/retsx/quote.html
If this was a true active fund, how could I tell?
Turnover is published - check Morningstar.

Also look at the shape of the graph in barniclebob's link above. Notice that RETSX follows every little "jog" of the SP500.
Last edited by David Jay on Wed Jun 21, 2017 2:58 pm, edited 1 time in total.
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Re: Closet Index fund?

Post by BogleAlltheWay »

The Wizard wrote:
inbox788 wrote:
BogleAlltheWay wrote:Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX


I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
Any benefits to the "Tax-Managed"? Probably not worth the large expense, but if they were equal expense/cost, is there any benefit or are you still better off with the index? And how do they tax-manage?
They tax-manage by not selling any holdings and thus never having capital gains to distribute.
This happens practically by definition with a total market index fund and probably with an S&P 500 index fund also.
Now the S&P 500 adds and removes companies on a regular basis as valuations change. The companies which are removed from the S&P 500 get sold the next week by those index funds, but I'm guessing many of them get sold for a loss, so no CGs to distribute...
Does the money to pay for higher ER funds come out of the fund's distributions?
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Re: Closet Index fund?

Post by BogleAlltheWay »

David Jay wrote:
BogleAlltheWay wrote:
barnaclebob wrote:Yep, pretty safe to say that this is a closet index fund where the managers so far have been paid for nothing:

http://www.morningstar.com/funds/xnas/retsx/quote.html
If this was a true active fund, how could I tell?
Turnover is published - check Morningstar.

Also look at the shape of the graph in barniclebob's link above. Notice that RETSX follows every little "jog" of the SP500.

If turnover is high then it is active, but if the turnover is how can I tell if it just an index or the fund manager holding stocks for long?

The r squared is .98 so it does follow the index, but barnaclebob mentioned that you also have to look at total returns too.
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Re: Closet Index fund?

Post by Avo »

The phrase "closet index fund" is not precisely defined. Generally it refers to an actively-managed fund whose results closely follow those of a passively managed index fund (for some particular index, like the S&P500), but there is no general agreement on how close the results need to be for this term to apply.

According to its prospectus, your fund is actively managed:

https://russellinvestments.com/us/funds ... e-cap-fund
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Re: Closet Index fund?

Post by David Jay »

Avo wrote:The phrase "closet index fund" is not precisely defined. Generally it refers to an actively-managed fund whose results closely follow those of a passively managed index fund (for some particular index, like the S&P500), but there is no general agreement on how close the results need to be for this term to apply.

According to its prospectus, your fund is actively managed:

https://russellinvestments.com/us/funds ... e-cap-fund
This is a good point for the OP - there is no precise definition for "closet index fund" and no firm offering a managed fund at a .95 ER is going to say "oh, yeah, we just follow the SP500 index and charge you an extra .90 (compared to Index 500 fund) because we want your money".

But it sure looks that way, especially the way the M* graph positions the two (notice that the Large Cap Growth zigs sometimes when the SP500 zags, but RETSX zigs and zags in the same way that the SP500 does).
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Re: Closet Index fund?

Post by BogleAlltheWay »

David Jay wrote:
Avo wrote:The phrase "closet index fund" is not precisely defined. Generally it refers to an actively-managed fund whose results closely follow those of a passively managed index fund (for some particular index, like the S&P500), but there is no general agreement on how close the results need to be for this term to apply.

According to its prospectus, your fund is actively managed:

https://russellinvestments.com/us/funds ... e-cap-fund
This is a good point for the OP - there is no precise definition for "closet index fund" and no firm offering a managed fund at a .95 ER is going to say "oh, yeah, we just follow the SP500 index and charge you an extra .90 (compared to Index 500 fund) because we want your money".

But it sure looks that way, especially the way the M* graph positions the two (notice that the Large Cap Growth zigs sometimes when the SP500 zags, but RETSX zigs and zags in the same way that the SP500 does).
I do get there is no exact definition but I assumed a .98 correlation would be a slam dunk for it being a closet index.
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Re: Closet Index fund?

Post by Avo »

Whatever. Most of us are not interested in labeling actively-managed funds that we would not consider buying.
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Re: Closet Index fund?

Post by pkcrafter »

Definition of a closet index fund from free dictionary:
Closet Index Fund
A mutual fund that is actively managed in theory, but more or less tracks a benchmark stock index. Closet index funds generally exist because their managers believe it is safer to generally track indices rather than take on the greater risks incumbent with more active management. Closet index funds do not advertise themselves as such, but one may determine whether a mutual fund is one by comparing its R square to a given index. Some advisors counsel staying away from closet index funds as they carry fees and commissions associated with mutual funds, and one can directly invest in an index for less expense, while achieving the same result.
It walks like a duck and it quacks like a duck...

RETSX isn't copying the S&P500, but it was designed to perform like the 500 before fees. It performs like an S&P500 fund with a high expense ratio. High correlation, but it only contains 315 stocks, turnover is 23% compared to 4% for S&P500, and it's market cap is different. It does a good job on tax control, but so does S&P500 index funds. There is no good reason to hold this fund because you can get S&P500 performance for a much lower ER.


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Re: Closet Index fund?

Post by BogleAlltheWay »

pkcrafter wrote:Definition of a closet index fund from free dictionary:
Closet Index Fund
A mutual fund that is actively managed in theory, but more or less tracks a benchmark stock index. Closet index funds generally exist because their managers believe it is safer to generally track indices rather than take on the greater risks incumbent with more active management. Closet index funds do not advertise themselves as such, but one may determine whether a mutual fund is one by comparing its R square to a given index. Some advisors counsel staying away from closet index funds as they carry fees and commissions associated with mutual funds, and one can directly invest in an index for less expense, while achieving the same result.
It walks like a duck and it quacks like a duck...

RETSX isn't copying the S&P500, but it was designed to perform like the 500 before fees. It performs like an S&P500 fund with a high expense ratio. High correlation, but it only contains 315 stocks, turnover is 23% compared to 4% for S&P500, and it's market cap is different. It does a good job on tax control, but so does S&P500 index funds. There is no good reason to hold this fund because you can get S&P500 performance for a much lower ER.


Paul
"Closet index funds do not advertise themselves as such, but one may determine whether a mutual fund is one by comparing its R square to a given index."
That works for me. I get it. It doesn't hold every stock, but the ones it does and the weighting, make it like an index fund.
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Re: Closet Index fund?

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You have to admire the audacity of the people who skim 1% off a stock index fund. I am thinking it would be good business to get into. Can't be too difficult.
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Re: Closet Index fund?

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Pajamas wrote:You have to admire the audacity of the people who skim 1% off a stock index fund. I am thinking it would be good business to get into. Can't be too difficult.
Most people don't know,. Myself included, until about a few months ago. You really have to look to find out. When I got roped into this, it seemed great. The fund is a fund of funds with RETSX fund being about half of it. It has bonds, international, real estate, etc. They automatically balance it and they change the allocation of funds depending upon how they think the market will do.
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Re: Closet Index fund?

Post by triceratop »

BogleAlltheWay wrote:
Pajamas wrote:You have to admire the audacity of the people who skim 1% off a stock index fund. I am thinking it would be good business to get into. Can't be too difficult.
Most people don't know,. Myself included, until about a few months ago. You really have to look to find out. When I got roped into this, it seemed great. The fund is a fund of funds with RETSX fund being about half of it. It has bonds, international, real estate, etc. They automatically balance it and they change the allocation of funds depending upon how they think the market will do.
Right, sure, and the fund of fund wrapper fees might be worth it for that service, but the RETSX fees sure ain't worth it. Regardless of whether RETSX is a closet index fund or not, it is best to use actual honest to goodness index funds, and not just for lower fees. There are fund of funds for index funds too, of course (Target date, LifeStrategy from Vanguard for example, and lifecycle funds from other companies etc.)
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Re: Closet Index fund?

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David Jay wrote:
BogleAlltheWay wrote:
barnaclebob wrote:Yep, pretty safe to say that this is a closet index fund where the managers so far have been paid for nothing:

http://www.morningstar.com/funds/xnas/retsx/quote.html
If this was a true active fund, how could I tell?
Turnover is published - check Morningstar.
The prospectus claims that last year the turnover was 23%.
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Re: Closet Index fund?

Post by inbox788 »

BogleAlltheWay wrote:It is more tax efficient than an S&p 500 fund but only by .30% or so.
That doesn't even include the advisory fee so I have no doubt that the index fund is way better.
What do you look at to get this figure?

TTM Yield 0.77%
Turnover 23%
30-Day SEC Yield 0.81%

http://www.morningstar.com/funds/XNAS/VIIIX/quote.html
TTM Yield 1.95%
Turnover 5%
30-Day SEC Yield 1.99%

FYI, VIIIX manages to beat out "S&P 500 TR" used in Morningstar comparison.

The higher turnover doesn't say anything about the capital gains distributions, which depend on whether the the turnover is for net positive or negative gains. With much lower dividends distributions, more of the gains are kept in growth.
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Re: Closet Index fund?

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BogleAlltheWay wrote:
inbox788 wrote:
BogleAlltheWay wrote:Russell Investments Tax-Managed U.S. Large Cap Fund Class S RETSX

I am going to take it out and put it in an index fund. It only has about 5k in capital gains. I was curious to find out if the fund was actually active as opposed to just tracking the index.
Any benefits to the "Tax-Managed"? Probably not worth the large expense, but if they were equal expense/cost, is there still a benefit or are you still better off with the index?
It is more tax efficient than an S&p 500 fund but only by .30% or so.
That doesn't even include the advisory fee so I have no doubt that the index fund is way better.
The .98% expense ratio comes out of the dividend yield, which is taxed at 20% in M*'s computations. That is 0.19% in reduced tax costs right there, but for the wrong reason.

Even within Vanguard, Tax-Managed Capital Appreciation isn't worth the extra cost over the similar 500 Index except in the top tax bracket.
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Re: Closet Index fund?

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (theory).

Morningstar has some background info: Watch Out for Closet Index Funds
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Re: Closet Index fund?

Post by TD2626 »

Paying ~1% for a fund - even an active fund - is far too high and in my opinion is generally unacceptable. I think paying >0.5% is very hard to justify as well.

1. If an active fund is desired, there are low cost options from companies like Vanguard (for as low as 0.16% ER).

2. If a product like a closet index fund (but with a lower expense ratio) is desired, there are things like "enhanced index funds" or "fundamental index funds" that are semi-active-ish and sortof like closet index funds but at least they tell you what they're doing in their name. Read prospectuses and check expense ratios in all cases, though.

3. If an index fund is desired, (this is the best option for most), it's best to get rock bottom rates from the largest companies. Like 0.05% or less for a Total domestic fund. The only thing worse than paying 1% for an active fund is paying 1% for an index fund. There are sadly people who do both.
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Re: Closet Index fund?

Post by BogleAlltheWay »

triceratop wrote:
BogleAlltheWay wrote:
Pajamas wrote:You have to admire the audacity of the people who skim 1% off a stock index fund. I am thinking it would be good business to get into. Can't be too difficult.
Most people don't know,. Myself included, until about a few months ago. You really have to look to find out. When I got roped into this, it seemed great. The fund is a fund of funds with RETSX fund being about half of it. It has bonds, international, real estate, etc. They automatically balance it and they change the allocation of funds depending upon how they think the market will do.
Right, sure, and the fund of fund wrapper fees might be worth it for that service, but the RETSX fees sure ain't worth it. Regardless of whether RETSX is a closet index fund or not, it is best to use actual honest to goodness index funds, and not just for lower fees. There are fund of funds for index funds too, of course (Target date, LifeStrategy from Vanguard for example, and lifecycle funds from other companies etc.)
I agree with you. I know that now but I didn't when I purchased it. If you don't know much it sounds great. It is counter intuitive that you can do a better job than the "expert." Normally, if you try to save money by not hiring a professional, the best you can hope for is a comparable job.


@ inbox788 I estimated the tax cost using the sheet found on viewtopic.php?t=208818 and put in the numbers to get my estimated tax. Or you can estimate by comparing the returns and after tax returns. Also see @grabiner's reply.
grabiner wrote: The .98% expense ratio comes out of the dividend yield, which is taxed at 20% in M*'s computations. That is 0.19% in reduced tax costs right there, but for the wrong reason.

Even within Vanguard, Tax-Managed Capital Appreciation isn't worth the extra cost over the similar 500 Index except in the top tax bracket.
It is nice to save on tax but I want my dividends.
I was surprised when I saw that Tax-Managed Capital Appreciation was not worth it for me. At least, the Tax-Managed Small cap is worth it for me.

If anyone is interested, here is a link to a Larry Swedroe article discussing some of the funds:
https://www.advisorperspectives.com/art ... -investors
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