An inventory index fund is an index fund that serves as a trading mechanism to accommodate security transactions initiated by active equity investment managers operating under the same trust or master trust. It functions as an “intra-trust” clearinghouse to improve total investment performance of the equity component of corporate pension assets by avoiding or substantially reducing trading costs and operating fees.

Several inventory index funds are currently in operation. This article draws on the experience of an operating inventory index fund as well as historical simulations to develop the rationale for the inventory index fund concept; explains the operation of an inventory index fund by tracing the process from the initial investment decision through ultimate disposition; describes the results of an actual fund; and sets forth some long-term implications for active and passive investment management, the role of the plan sponsor and the operation of the securities markets.