Index Fund Investment Model: A System Dynamics Approach

Abstract

Index Funds and Exchange Traded Funds (ETFs) have experienced tremendous growth in the US and Indonesia in the past decades. While index funds have grown in popularity, they do not all operate equally, nor do they perfectly mimic the market index. Various factors affect the performance and survival of these funds, but they are often overlooked or studied separately. This study fulfilled the gap by modeling the structure that drives fund performance and flow behavior. The proposed model incorporated several feedback mechanisms and considered variables that have previously been studied in isolation to better understand how an index fund operates. It was found that fund management and investor decision-making processes are endogenous parts of a system that influences fund performance and flows. The proposed model offered a more holistic view of index fund structure which could help fund managers identify leverage points to improve fund performance.