Hello, propably I just need some help here to not loose confidence in the stuff we’re getting teached… but looking at the Advantages and Disadvantages of Enhanced Indexing of Fixed Income Portfolios vs Pure Indexing the curriculum states:
Advantage:
Disadvantages:
What am i missing here for those 2 to make sense?
Appreciate any help.
Regards, Flo
you are making an active bet - so expected higher return.
but if you deduct transaction costs and fees - you would fall below index.
Full replication will end up with a return the same as the index before costs, and lower than the index after costs.
Enhanced indexing will allow you to buy less bonds so your costs are typically lower, and you may earn some active return. you will still probably return less than the (cost free) index though once your trading costs are considered.