Exchange-Traded Funds vs. Index Funds (original) (raw)
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The performance and trading characteristics of exchange-traded funds
This study examines the performance and trading characteristics of exchange-traded funds (ETFs) in Australia. We investigate the ability of index oriented (classical) ETFs to track underlying equity benchmarks on the Australian Stock Exchange, and provide a comparison of the tracking error volatility between these types of market-traded instruments and equity index funds operated off-market. Our study finds that while index-oriented ETFs closely track their respective benchmarks, these instruments have not been embraced to the same extent as in overseas markets, and relative to off-market index managed funds. Our research provides an important comparison of classical ETFs between Australia and the United States.
An analytical performance comparison of exchange-traded funds with index funds: 2002–2010
2011
Exchange-traded Funds (ETFs) have been gaining increasing popularity in the investment community, as evidenced by their high growth both in the number of ETFs created and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this article we examine whether this growing demand for ETFs can be explained through their outperformance as compared with index mutual funds. We consider the population of all ETFs with inception dates before 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had an inception date before 2002. This led to a sample of 230 paired matches for all the styles. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharpe Ratios and risk-adjusted buy and hold total returns for the period 2002–2010. We then applied the Wilcoxon signed rank test to ...
An analytical performance comparison of exchanged traded funds with index funds: 2002-2010
Eprint Arxiv 1111 0389, 2011
Exchange Traded Funds (ETFs) have been gaining increasing popularity in the investment community as is evidenced by the high growth both in the number of ETFs and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this paper we examined if this growing demand for ETFs can be explained through their outperformance as compared to index mutual funds. We considered the population of all ETFs with inception dates prior to 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had inception date prior to 2002. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharp Ratios and risk adjusted buy and hold total returns for the period 2002-2010. We then applied the Wilcoxon signed rank test to examine if ETFs had better performances than index mutual funds during the sample period. Out of the 230 paired matches of all the styles, ETFs outperformed index mutual funds in 134 of the times in terms of Sharpe Ratio, however, the test of the hypothesis showed no statistically significant difference between ETFs and index funds performances in terms of Sharpe ratio. Out of the 230 paired matches of all the styles, ETFs outperformed index mutual funds in 125 of the times in terms of risk adjusted buy and hold total return, however, the test of hypothesis showed no statistically significant difference between ETFs and index funds performances in terms of risk adjusted buy and hold total return. These findings indicate there is statistically no significant difference between ETFs and passive index mutual funds performances at the fund level and investors' choice between the two is related to product characteristics and tax advantages.
Performance and Trading Characteristics of Exchange Traded Funds: Developed vs Emerging Markets
2015
Exchange Traded Funds (ETFs) are one of the most successful financial innovations of the last decades. The main focus of this study is to examine the risk adjusted performance, tracking error and trading characteristics of emerging and developed markets ETF. 43 passively managed equity ETFs have been chosen to cover both markets. The results indicate that the emerging markets are less efficient in terms of index replication and possess higher tracking error compared to the developed market ETF. Conversely, emerging markets provide better risk adjusted performance. Last but not least, it is also found that assets size has positive impacts towards ETFs performance and in contrast, the expense ratio has a negative impact on ETFs performance. To determine the policy matters, investment types and strategy for the two different types of capital market products, this study is quite relevant to the individual investor, institutional investors, policy makers and the regulators.
Measuring Performance of Exchange-Traded Funds
The Journal of Index Investing, 2013
Fund selection is an important issue for investors. This topic has spawned abundant academic literature. Nonetheless, most of the time, these works concern only active management, whereas many investors, such as institutional investors, prefer to invest in index funds. The tools developed in the case of active management are also not suitable for evaluating the performance of these index funds. This explains why information ratios are usually used to compare the performance of passive funds. However, we show that this measure is not pertinent, especially when the tracking error volatility of the index fund is small. The objective of an exchange traded fund (ETF) is precisely to offer an investment vehicle that presents a very low tracking error compared to its benchmark. In this paper, we propose a performance measure based on the value-at-risk framework, which is perfectly adapted to passive management and ETFs. Depending on three parameters (performance difference, tracking error volatility and liquidity spread), this efficiency measure is easy to compute and may help investors in their fund selection process. We provide some examples, and show how liquidity is more of an issue for institutional investors than retail investors.
2016
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Investigating European ETFs: The Case of the Swiss Exchange Traded Funds
In this paper we study the performance and the trading characteristics of a sample of 36 Swiss Exchange Traded Funds during the period 2001-2006. Using daily data we find that Swiss ETFs underperform their underlying indexes and encumber investors with greater risk. We also find that Swiss ETFs do not adopt full replication strategies and the magnitude of tracking error is substantial to an approximate average of 1.02%. Further investigation reveals that the tracking error is positively related to the management fees and risk of ETFs while the impact of expenses on ETFs performance is negative on ETF investor returns. Finally, in regression results we estimate that the volume of Swiss ETFs is positively affected by the intraday price volatility, the number of trades, and the trading frequency while a significant part of volume is unrelated to the above factors.
The Tracking Ability of Physical and Synthetic Exchange Traded Funds on the Asian Market
2017
With various studies done on the tracking abilities of exchange traded funds for the European and U.S. market, we observed that similar empirical studies are scarce for the Asian Pacific region. This work serves as to fill the gap in research and to provide the reader with an analysis on how well the different ETF replication methods track their indices on the Asian market. Using a sample of 389 Asian equity and fixed income ETFs tracking a total of 270 indices we calculate for each fund three different tracking errors based on different methodologies using closing prices. We will then use an ANOVA model to compare the differences in tracking errors of full & derivative replication, full & optimized replication, and derivative & optimized replication. In the last step we conduct a simple regression to identify the determinants of tracking errors. Our results indicate that optimized funds are the best at replicating their indices mostly due to the liberty of choice to exclude dividend paying stocks and the reduction of rebalancing costs due to a sampling of the index. While not statistically significant, the additional returns generated through securities lending also enhance ETF tracking performances of physical ETFs in comparison to synthetic funds. JEL Classification: G11, G15, G23
Tracking Ability and Pricing Efficiency of Exchange Traded Funds: Evidence from Borsa Istanbul
Business and Economics Research Journal, 2015
The purpose of this study is to evaluate the performance and pricing efficiency of the exchange-traded funds (ETFs) operating in the Turkish Capital Markets. In this paper, we examine the tracking errors and pricing efficiencies of 16 ETFs during the period 2005-2013. This is the first paper that makes an investigation with covering all ETFs in Turkish Capital Markets. Using daily data, we find out that Turkish ETFs underperform their underlying indices. We use three different methods (arithmetic mean, absolute mean and quadratic tracking error) to measure the tracking errors and find that these errors are significantly different from zero. The pricing efficiencies of ETFs are computed using four different methods: premiums and discounts calculated in Turkish Liras (TL) and percentage and absolute values of these calculations. As a result of our analysis, we find that Turkish ETFs are priced closely to their net asset values and there exists no arbitrage opportunities in this context.
The exchange traded funds’ pricing deviation: analysis and forecasts
Journal of Economics and Finance, 2009
In this paper, we study the price deviations of the three most liquid Exchange Traded Funds (ETFs): the Spiders (S&P500 tracking ETF); the Diamonds (Dow Jones Industrial Average tracking ETF); and the Cubes (NASDAQ 100 tracking ETF). The price deviation is stationary and predictable, and therefore can be considered an additional, implicit transaction cost (in addition to the bid-ask spread, and the explicit transaction costs, such as brokerage and maintenance fees). The reason for the predictability of the pricing deviation stems from its stationarity, clustering of volatility, specific price discovery processes, lead-lag relationships and dividend accumulation and distribution for this asset class. We conduct a comprehensive study of ETF pricing deviation and provide new perspectives for the performance evaluation literature which is using a static benchmark. The current state of computational technology allows for more precise computations when benchmarks for performance such as accounting for different costs associated with the selection of a benchmark are used.