Abstract
It is well known that actively managed mutual funds use exchange-traded funds (ETFs), although current research has yet to establish the benefits of these positions. Focusing on ETF type, we investigate whether or not ETFs impact portfolio management. Funds using benchmark ETFs see reductions in cash holdings, particularly during periods of large flows, and lower tracking error. In contrast, non-benchmark ETF positions improve the performance of large mutual funds investing in micro-cap stocks while also reducing portfolio risk. While studies caution against the extensive use of ETFs, we conclude that ETFs can provide tangible benefits for funds when considering the type of ETF used.
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