What is an Index Hugger?

An index hugger is a type of mutual fund whose performance closely tracks a major stock index.

How Does an Index Hugger Work?

An index hugger is also referred to as a closet tracker.

An index hugger is an actively-managed fund whose value fluctuations closely mirror those of a major market index (e.g. the Dow Jones or the S&P 500). For instance, if the Dow Jones experiences a 500 point rise in value, an index hugger will perform in a very similar manner.

Why Does an Index Hugger Matter?

In most cases, it's better for an investor to invest in a low-cost index ETF rather than paying for an actively-managed index hugging fund. The only reason to consider paying higher costs for a managed fund is if the portfolio manager has a track record of outperforming the market. An index hugger, by definition, will not give you that added benefit.