Abstract
Exchange-traded funds (ETFs) have grown considerably since their first introduction two and a half decades ago, becoming one of the most popular passive investment vehicles among retail and professional investors. However, their tracking ability is often questioned. In this paper we estimate tracking errors from a sample of 15 American and European ETFs utilizing three different methods. We find that American ETFs seem to exhibit lower tracking errors than European ETFs in all measurements of tracking error. We also analyse and discuss the factors that influence tracking error. Fund size and expense ratios are found to be affecting the tracking ability of ETFs. The results of this study concerning the performance and tracking error determinants of ETFs are consistent with the evidence presented in the literature. To our knowledge, this is the first study to compare American and European ETFs in terms of their tracking ability and their tracking error determinants.
Highlights
Exchange-traded funds are securities that track indexes, commodities or baskets of assets and trade like stocks in stock exchanges
This study finds that some Exchange-traded funds (ETFs) exhibit noticeable tracking errors while trying to replicate the performance of their underlying indices
This is somehow expected as ETFs frequently suffer deviations in performance compared to their underlying indexes because of frictions occurring in the market
Summary
Exchange-traded funds are securities that track indexes, commodities or baskets of assets and trade like stocks in stock exchanges. They can be purchased and sold during the trading day like any other stock making it possible for private and institutional investors to acquire exposure to entire stock markets in different sectors of an economy or across countries and continents and at low costs. ETFs generally have a lower expense ratio than the equivalent passive mutual funds. The most important difference is the creation and redemption of ETF shares; contrary to mutual funds, ETFs do not sell or redeem their individual shares at net asset value (NAV)
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Risk Governance and Control: Financial Markets and Institutions
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
