Performance drag

Performance Drag

A situation in which an index fund does not perform exactly the same as the index it is supposed to follow. Performance drag occurs when the fund does not precisely track the underlying index; that is, it occurs when the fund includes other investments. Commonly, performance drag can occur when the money manager allocates part of the fund to cash and cash equivalent to improve its liquidity. However, high performance drag may indicate that the index fund is not much of an index fund at all. See also: Closet index fund.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Performance drag.

Performance drag describes a situation in which an investment -- such as an index mutual fund or exchange traded fund (ETF) -- lags behind the index that it is designed to track. Performance drag can occur for a variety of reasons.

One example, known as cash drag, occurs when a fund allocates a portion of its portfolio to cash, causing its performance to underperform its underlying index. Cash drag may especially affect open-end index funds, which may need cash to buy back shares that investors want to sell.

Performance drag is illustrated by a fund's tracking error -- a calculation of how much an index-tracking investment deviates from its underlying index.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Portfolio protection becomes less "important" and that performance drag caused by diversifiers in an up market becomes a source of frustration and impatience for clients.
With return on equity (ROE) being a key performance factor, too much "E" in the ROE equation (E is the denominator) creates a performance drag in the calculation.
For example, while proxying is critical for some applications, they are an unacceptable performance drag for others.
It became more and more difficult for the staffs to work together as the under-the-surface power struggle exacted a huge emotional and performance drag. Soon, profits stagnated while staff defections accelerated.
The primary and secondary write I/Os are completely independent of each other, eliminating the possibility of a performance drag on the application.
At Princeton I was dressed in casual butch blue jeans, rather than my usual ultra-femme, high-maquillage, Auntie Mame performance drag, to signal that I was not the central focus: Cindy Crawford was.
Although stocks have had a rocky start so far in 2016, prices could tick higher, creating a performance drag for funds with large cash positions.
In order to avoid the possible performance drag created by an unwanted cash position and to maintain the portfolio's overall objectives, proceeds from this sale may then be invested in a highly correlated ETF with similar attributes.
We maintain our Underperform rating trading at 0.7x 2010E NAV as we think operating performance drag is likely to keep RoE<14% in 2011E.
From the client's perspective, however, the potential performance drag from such a high cash allocation may easily exceed the management fee savings relative to competitors," the analysts explained.
By giving equal weight to, say, the 100 largest stocks in a given universe, an equally weighted portfolio avoids the performance drag of cap-weighted's preference for popular stocks and will also capture the return advantage of smaller stocks.
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