On the Performance of Fixed-Income Exchange-Traded Funds

Abstract

The authors evaluate the performance of fixed-income exchange-traded funds (ETFs). They find that Treasury ETFs are indeed able to track their benchmarks but that investmentgrade corporate bond ETFs underperform their benchmarks and high-yield corporate bond ETFs severely underperform their benchmarks. They provide evidence that the transaction costs of the underlying bonds are a key determinant of an ETF’s underperformance. The authors conclude that indices consisting of bonds that are more costly to trade are more difficult to track. <b>TOPICS:</b>Exchange-traded funds and applications, mutual fund performance, portfolio construction