Risk-Adjusted Performance of the Largest Active ETFs

Abstract

This study examines the performance of the 10 largest active exchange-traded funds. Using Jensen’s alpha, 50% of the largest active ETFs underperform their passive benchmarks, for both default and specific indexes. This implies that active ETFs are not appropriate as stand-alone investments. On the other hand, as part of a portfolio consisting of an active ETF, a benchmark index, and a risk-free asset, active ETFs play an integral role in the outperformance of the portfolio over the benchmark. This suggests that, for the purposes of enhanced risk-adjusted performance, active ETFs are better suited in a portfolio setting.