Active Share

Measure of how much a fund’s holdings differ from its benchmark index

Understanding Active Share as a metric for evaluating true active management versus closet indexing
Modified

September 7, 2025

Category: Analysis & Research
Difficulty: Advanced

Definition

A number showing how different a fund’s stocks are from its benchmark index. Higher numbers mean more active management.

Key Points

The Problem: Many “active” funds hold nearly identical stocks to their index but charge high fees. This is called closet indexing.

The Solution: Active Share reveals which funds are truly different from their benchmark.

How It Works

Active Share = 50% of the sum of differences between fund and index weights.

What the Numbers Mean

80-100% = Very Active - Fund picks very different stocks than index - Higher chance of big wins or losses - Examples: Small focused funds

60-80% = Active - Clear differences from index - Good chance to beat market - Examples: Growth or value funds

20-60% = Somewhat Active - Some differences but limited - Examples: Large institutional funds

0-20% = Closet Indexing - Nearly identical to index - Charges high fees for index-like returns - Poor deal for investors

Why Active Share Matters

Closet Indexing Problem: - Fund charges 1-2% fees - Holds same stocks as index - Returns index performance minus fees - Investors lose money to unnecessary fees

Solution: - Use Active Share to spot closet indexers - Choose funds with 60%+ Active Share - Or buy low-cost index funds instead

Research Results

Key Findings: - High Active Share funds beat indexes more often - Low Active Share funds underperform due to fees
- Active Share predicts performance better than past returns

Performance Patterns: - High Active Share = bigger wins and losses - Low Active Share = consistent small losses from fees

How to Use Active Share

Simple Rules: - Avoid funds below 60% Active Share - Look for 80%+ for focused strategies
- Check that Active Share stays consistent over time

Other Things to Check: - Does the fund have a clear strategy? - Is the management team stable? - Do the holdings make sense for the strategy?

Important Warnings

Active Share Limitations: - High Active Share doesn’t guarantee good performance - Random stock picking also creates high Active Share - Numbers can change based on which index you compare to - Some concentrated funds take too much risk

When It Doesn’t Work: - During certain market conditions - When the manager makes bad stock picks - If the benchmark comparison doesn’t make sense

Bottom Line

Active Share helps identify truly active funds versus closet indexers. Look for 60%+ Active Share, but remember it doesn’t guarantee good performance.

Further Reading

Original Research: - How Active Is Your Fund Manager? A New Measure That Predicts Performance - Cremers & Petajisto (2009), SSRN - Active Share and the Three Pillars of Active Management - Petajisto (2013), SSRN