A Quantitative Comparison of the Financial Returns of Index ETFs and Matched Index Mutual Funds

Abstract

Investments in exchange traded funds (ETFs) have gained significant popularity among the financial investors.ETFs track industry-based indexes. Index mutual funds also track industry-based indexes. The financial investorsdo not have a documented analytical method to compare the financial returns of index ETFs and matched indexfunds. We have performed quantitative comparisons of the financial returns of index ETFs and matched indexmutual funds with the use of nonparametric Kruskal-Wallis hypotheses tests, assuming that the financial returnsof index ETFs and matched index mutual funds are independent. We have tested the null hypotheses that themedians of the distributions of the Sharpe ratios and the risk-adjusted buy and hold returns of the S&P 500 index,large cap index, mid cap index, small cap growth index, REIT index, and total bond market index ETFs are asthe same as the medians of the distributions of the Sharpe ratios and the risk-adjusted buy and hold returns of thematched S&P 500 index, large cap index, mid cap index, small cap growth index, REIT index, and total bondmarket index mutual funds. The time periods of comparison have been from the inception dates of ETFs till theend of 2013. The findings from this research work suggest that we do not reject the null hypotheses that thedistributions of the Sharpe ratios and the risk-adjusted buy and hold returns of index ETFs and the distributionsof the Sharpe ratios and the risk-adjusted buy and hold returns of matched index mutual funds have the samemedians during the time periods that we have tested.