Incomplete Investor Search: Low-expense Index Funds and Fund Flows in a Management Company

Abstract

This paper shows that a low price of index funds draws investor attention to a management company, and investors' subsequent incomplete search within funds in the management company raises the flows of actively managed funds in the same management company by 10%. These spillover effects are more salient among retail investors and among share classes with direct distribution channels. At the management company level, offering low-expense index funds positively influences aggregated flows. Management companies strategically increase the expense ratios of actively managed funds after introducing low-expense index funds.