Tactical index fund
A Tactical Index Fund is an index fund that uses market timing strategies to enhance returns.
It aims to improve returns over traditional index funds while still keeping a low level of active risk.
This fund has a larger tracking error compared to a standard index fund due to its tactical strategies
Investment Strategy
Market Timing: The fund manager strategically buys index constituents based on market conditions.
Cash Management: Uses cash inflows from investors to time purchases more effectively.
Difference from Traditional Index Funds
Passively track an index with minimal changes, leading to a smaller tracking error but potentially lower returns due to cash drag and costs.
Actively manage purchases to potentially enhance returns, resulting in higher tracking error but no active risk
Benefits
By timing purchases, the fund may achieve slightly better returns than a traditional index fund.
Unlike actively managed funds, it does not involve security-selection bets outside the index.
Drawbacks
The tactical approach introduces variability in returns compared to the index.
Market timing and tactical management may involve higher operational costs.
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