Abstract
The Efficient Market Hypothesis holds that it is not possible to ‘beat the market’ and that a passive investment strategy is optimal. Traditionally investors have been able to do this by investing in index funds replicating an index, but the emergence of exchange traded funds (ETFs) has afforded investors with an alternative passive investment strategy. This paper employs several measures of tracking error to test the relative tracking ability of index funds and ETFs which track the FTSE/JSE Top 40 index. We find that ETF's are superior tracking instruments, although there is evidence to suggest that the performance of index funds has improved over the most recent three-year period.
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