Tracking Efficiency of Exchange Traded Funds (ETFs)

Abstract

Exchange traded funds (ETFs) have emerged as a new investment vehicle in the mutual fund industry providing investors with the ability to trade the entire market through a single transaction executed at the exchange. Using a sample of 12 equity ETFs from 1 April 2011 to 31 March 2015, the present article attempts to examine the performance efficiency of ETFs in India and explore factors that drive the performance of ETFs away from their target indices. The study reveals that ETFs exhibit significant tracking error while trying to replicate the returns of their benchmark indices. The results of panel regression analysis further reveal that the assets under management and volume positively affected the tracking ability of ETFs whereas volatility is reported to have negative impact on the tracking efficiency of ETFs. The results will have important implications for investors, managers as well as for the evaluation criteria involved in assessing the performance of actively managed funds.