A closet tracker is a fund that is supposedly actively managed, but that is nonetheless run in a very conservative manner that makes it little different from a tracker fund. The tracking error of a fund is a good indication of how actively managed (or not) it is.
Investors are generally better off investing in a genuine tracker fund for two reasons:
- A real tracker fund will charge (lower) tracker fund level fees.
- A real tracker fund will track its chosen index very accurately.
A closet tracker is not just a tracker fund, it is usually an expensive and sloppily run tracker fund.
Many supposed active funds are also in fact run as a combination of a closet tracker with a (often smaller) real active fund. Again, investors pay over the odds as they pay active management fees on their whole investment, but only part of it is really actively managed. In this case, enhanced indexing does the same more transparently with clearer limits and targets, as may a portfolio containing both active and passively managed funds.