Unpacking Alpha in Innovation-Driven ETFs: A Comparative Study of Artificial Intelligence and Blockchain Funds

Increasing sophistication of exchange-traded fund (ETF) indexation methods required that a comparison be drawn between various methodologies to establish the benefits of such product innovations. A risk-adjusted performance evaluation of four pre-selected ETF indexation categories was conducted to establish how alternative ETFs compare to standard market capitalisation–weighted ETFs. The research methodology involved that fundamentally weighted, equally weighted and leveraged ETFs were compared to traditional market capitalisation–weighted ETFs on the basis of risk-adjusted performance measures. Using a sample of South African and American ETFs, several risk-adjusted performance measures were employed to assess the risk and return of each indexation category. Special emphasis was placed on the Omega ratio because of the unique interpretation of the return series distribution characteristics. Findings show that fundamentally weighted ETFs outperformed the other categories during an upward moving market when using standard risk-adjusted performance measures. Moreover, the Omega ratio analysis revealed inherent unsystematic risk in alternatively indexed ETFs, and ranked market capitalisation–weighted ETFs as the best performing category. Equal-weighted ETFs delivered consistently poor rankings, whilst leveraged ETFs exhibited a high level of risk associated with the amplified returns of this category. The study highlights that recent ETF developments bring unique risks that require cautious implementation of alternative ETFs into a portfolio.

This study compares the risk-adjusted performance of technology mutual funds and exchange-traded funds with several benchmark indexes from January 2010 to July 2021. It is discovered that the average monthly returns on technology mutual funds and exchange-traded funds were highly correlated with the DJIA US Technology, NASDAQ 100 Tech, NYSE Arca Tech 100 Index, and S&P 500 Information Technology benchmark indexes. Furthermore, technology mutual funds outperformed exchange-traded funds and benchmark indexes in absolute and risk-adjusted performance. In addition, it is discovered that institutional technology funds' risk-adjusted performance was marginally greater than noninstitutional funds' risk-adjusted performance, and index technology mutual funds outperformed nonindex funds in risk-adjusted performance. Unconditional models indicated that technology mutual fund managers may have some market timing ability but no security selection skill. Conditional performance evaluation models indicated that fund managers do not have superior security selection techniques or the ability to time the market.

Exchange-traded Funds (ETFs) have been gaining increasing popularity in the investment community, as evidenced by their high growth both in the number of ETFs created and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this article we examine whether this growing demand for ETFs can be explained through their outperformance as compared with index mutual funds. We consider the population of all ETFs with inception dates before 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had an inception date before 2002. This led to a sample of 230 paired matches for all the styles. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharpe Ratios and risk-adjusted buy and hold total returns for the period 2002–2010. We then applied the Wilcoxon signed rank test to examine whether ETFs had better performances than index mutual funds during the sample period. We conducted the test both within each style and for all the styles put together. In terms of Sharpe Ratio, out of the 12 styles included in the sample, for 5 styles the conclusion was that ETFs outperformed index funds, for 3 of the styles US Broad market, US large cap growth and US Reits index funds outperformed ETFs, and for 4 styles there was statistically no significant difference between ETFs and index fund performances. Out of the 230 paired matches of all the styles, ETFs outperformed index mutual funds 134 times in terms of Sharpe Ratio; however, the test of the hypothesis showed no statistically significant difference between ETFs and index fund performances in terms of Sharpe Ratio. The break-down of the results for risk-adjusted buy and hold total returns was slightly different from those for the Sharpe Ratio, though the overall conclusion was the same. For five of the styles, index funds outperformed ETFs, for three styles ETFs outperformed index funds, and for four styles there was statistically no significant difference between the performances of the two. Out of the 230 paired matches of all the styles put together, ETFs outperformed index mutual funds 125 times in terms of risk-adjusted buy and hold total return; however, the test of hypothesis showed no statistically significant difference between ETFs and index fund performances in terms of risk-adjusted buy and hold total return. These findings indicate that there is statistically no significant difference between ETFs and passive index mutual fund performances at the fund level, and that investors’ choice between the two is related to product characteristics and tax advantages.

Purpose The purpose of this paper is to investigate how healthcare funds differ from healthcare exchange-traded funds (ETFs) in terms of delivering positive alpha, beta, and hedging against a market downturn risk. The authors consider which vehicle is more effective in providing diversification within the healthcare sector and to what extent can investors gain by diverting a portion of their holdings in the S&P 500 index fund into either a value-weighted healthcare fund portfolio or ETFs. Design/methodology/approach Pooled and individual regressions are employed to estimate single and four-factor models of 132 healthcare mutual funds and 43 healthcare ETFs over the past four decades. The authors performed additional regressions to test the performance of mutual funds and ETFs relative to market volatility, market downturns, and policy influence. Findings The authors find that both healthcare funds and ETFs provide significantly positive average alpha and hedge against a market downturn risk. Holding an all-stock portfolio such as the S&P 500 index fund can be improved by simply adding a value-weighted healthcare portfolio, resulting in both a higher return and a lower standard deviation. However, returns for these funds and ETFs perform poorly in a very volatile market. ETF returns increased with the passing of the Obamacare. Healthcare sector funds and ETFs declined with the recent criticism from Donald Trump since he became the apparent GOP nominee in July of 2016. Originality/value Extending the literature in both sample size and scope of issues, this paper provides investors and financial advisors with practical guidance for achieving higher portfolio return while lowering standard deviation. Additionally, this study documents policy influence on the returns of healthcare mutual funds and healthcare ETFs.

Hedged Exchange Traded Funds (ETFs) provide individual investors with the opportunity to invest in ETFs that follow strategies similar to those of hedge funds and seek returns uncorrelated with the market. In this article I analyze the performance of six different categories of 49 Hedged ETFs and 539 Hedged Mutual from January 2008 to December 2014, and compared them with five different asset categories of index ETFs. Hedged ETFs and Mutual Funds had highly negative or low correlation with other index ETFs which indicates that they did help investors diversify. Hedged ETFs also had much lower risk compared with other index ETFs with the exception of bond market ETF AGG. However, this did not translate into superior absolute or risk-adjusted performance, and Hedged ETFs underperformed all other asset categories (with the exception of Commodities ETF DBC). The absolute- and risk-adjusted performance of Hedged Mutual Funds was similar to that of Hedged ETFs. Based on these findings investors would have been better off with index fund ETFs.

This paper investigates the feasibility of using crude oil prices to forecast the future performance of major Exchange-Traded Funds (ETFs) using data spanning from January 1, 2000, to June 1, 2024, which can have a significant impact on investment choices and portfolio management. The chosen ETFs include SPDR S&P 500 ETF (SPY), iShares MSCI Emerging Markets ETF (EEM), iShares MSCI Australia ETF (EWA), iShares MSCI Canada ETF (EWC), iShares China Large-Cap ETF (FXI), and Vanguard FTSE Europe ETF (VGK). The study comprises two main analyses: firstly, investigating the relationship between the Dow Jones Industrial Average Crude Oil Index and various ETFs; secondly, utilizing a predictive trading strategy with crude oil futures to predict ETF returns. The results indicate a notable inverse correlation between crude oil prices and ETF returns, suggesting that as crude oil prices increase, ETF returns tend to decrease. Moreover, the predictive strategy showcases significant annualized returns and favorable risk-adjusted performance, indicating that trading based on crude oil futures can lead to consistent profits. These findings offer valuable insights for both investors and policymakers, emphasizing the potential of crude oil prices as a predictive factor for ETF performance. By integrating crude oil price movements into their strategies, investors can improve their portfolio management and make more informed investment choices.

This study investigates the performance of the largest U.S.-domiciled exchange-traded funds (ETFs) focused on large-cap equities by assets under management (AUM), covering the period from 2010 to 2024. ETFs play a central role in modern investing, offering low-cost, diversified, and liquid access to broad market exposures. While previous research has examined various ETF categories, this paper concentrates on the core group of top equity ETFs that dominate investor portfolios. Using a set of well-established performance metrics—total return, average annual return, standard deviation, alpha, beta, Sharpe ratio, and Treynor ratio—the analysis assesses both absolute and risk-adjusted performance across eight ETFs. The results reveal notable differences in return generation and risk efficiency, even among funds with similar investment styles. Growth-oriented ETFs generally delivered higher returns but also exhibited greater volatility, while more conservative or value-focused ETFs showed mixed outcomes. The ranking model applied in this study helps clarify which ETFs achieved superior overall performance based on a balanced evaluation of return and risk. The findings highlight the importance of multi-metric analysis when selecting ETFs for long-term investment strategies.

In this study, the authors analyzed the performance of the exchange traded funds (ETFs) of the European iShares family, using risk-adjusted performance measures: Sharpe index, Treynor index, Sortino index, and Jensen's alpha. They also checked the beta-performance ratio and conjectured that ETFs with the highest betas are the ones that perform best. From the results obtained, they conclude that all ETFs had an average return lower than that of the respective benchmark. Using the Sharpe index, they found that no ETF performed better than its benchmark. As for the Treynor index, two ETFs, namely Belgium and Switzerland, performed better than the respective benchmark. As with the Sharpe index, for the Sortino index, no ETF exceeded its benchmark. As for the beta-performance relationship, the results indicated the existence of the low-risk anomaly.

An earlier foray into the performance of environmental, social, and governance exchange-traded funds depicted extremely low risk-adjusted returns achieved at the cost of considerable additional systematic risk. This updated analysis of environmental, social, and governance exchange-traded funds indicates that they are finally beginning to show improvement in their performance. Their risk-adjusted performance is palpably better, and their contribution to systematic risk, less perceptible. They are also doing better in terms of alpha, although in some cases the alpha contribution is neither high nor dependable. Altogether, although this moderately improved market picture could be adequate for most individuals who want to invest with their conscience, it remains unclear whether it is enough to generate a meaningful commitment from those who, under the Employee Retirement Income Security Act, are mandated to act in the best financial interests of 401(k) plan participants. <b>TOPICS:</b>Exchange-traded funds and applications, ESG investing, mutual fund performance <b>Key Findings</b> • ESG ETFs are now competitively priced and should no longer be considered a product for which investors pay a premium. Yet, their market continues to be highly concentrated, and its footprint remains trivial in relation to the overall ETF market. • ESG ETFs have measurably improved in terms of their contribution to systematic risk (beta) and the excess return they bring above and beyond the SPY (alpha), the fund against which their performance was evaluated. • ESG ETFs show modest returns, lagging behind the SPY, so it remains to be seen whether this is enough to generate a meaningful commitment from those with a fiduciary responsibility to invest in the best financial interests of their plan participants.

Unskilled fund managers: Replicating active fund performance with few ETFs

This paper uses Exchange Traded Funds (ETFs) instead of risk factors as benchmarks to examine active mutual fund performance distribution. While transaction costs are included in the ETF returns, that is not true regarding risk factors, making it more challenging to characterize extraordinary performances via alphas. Assessments are based on the estimation of the skilled funds proportion defined by Barras et al. (2010). After evaluating several ETF combinations, we conclude that sets of 3 to 5 ETFs replicate most levels of active fund performance. Finally, we propose specific ETF selection algorithms, whereby we estimate that 95% of active management funds fail to generate value for their investors. Alphas calculated with ETFs are higher than those using risk factors, and the difference is similar to the transaction costs required for investing in risk factor portfolios (Frazzini et al. (2012)).

The aim of this research is to obtain empirical evidence about the effect of stock selection skills, market timing ability, fund size and fund age on the performance of exchange trade funds. The population in this study are all exchange trade fund investment products listed on the Indonesia Stock Exchange from 2017 to 2019. The sampling technique uses purposive sampling. To test the hypothesis, multiple linear regression analysis was used. This study proves that stock selection skills have a positive effect on the performance of exchange trade funds in Indonesia. Meanwhile, market timing ability, fund size and fund age do not have a positive effect on the performance of exchange trade funds in Indonesia. The reason is that only one investment manager PT. Indo Premier Investment Management which is always active in trading exchange trade funds in Indonesia. This research has implications for the more active investment managers in offering exchange trade fund products to attract investors because they are able to survive in times of crisis.&#x0D; Keywords: Exchange Trade Funds; Investation.

Homebuilder ETFs provide investors with a diversified portfolio of residential construction and sales companies which reduces risks associated with individual stock selection in the sector. This study examines the net monthly returns of homebuilder exchange-traded funds (ETFs) through various performance evaluation models and market situations. The results reveal that these ETFs outperformed benchmark indices in absolute returns. Despite homebuilding being part of the real estate sector, the correlation between monthly returns of homebuilder ETFs and the Dow Jones US Real Estate Index, though positive, is not very high. The performance of ETFs varied across market conditions, demonstrating both outperformance and underperformance compared to U.S. stocks. During the COVID-19 pandemic, homebuilder ETFs displayed a decline, trailing behind U.S. equities in both absolute returns and risk-adjusted performance. This result emphasizes their vulnerability during economic crises. Utilizing a modified version of the Carhart factor model, significant exposure of real estate ETFs to the stock market was observed. Moreover, an assessment of ETF portfolio managers’ skills indicated proficiency in security selection but limited capabilities in market timing. Homebuilder ETFs pose higher downside risks than other indices, evident in their elevated Value at Risk (VaR) and Conditional Value at Risk (CVaR) values.

Leveraged Exchange Traded Funds (ETFs) (LETFs) are a recent and highly successful financial innovation; yet, investors and several studies criticized them for not performing as advertised, especially in the long term. Τhis paper discusses their unique characteristics and their path-dependent price dynamics, which may result in unexpected returns. Furthermore, the authors evaluate the performance of a large sample of European and American leveraged ETFs since each fund’s inception and show that they perform as intended for daily holding periods. Leveraged ETFs are also successful in delivering the promised performance over holding periods of up to one week, their performance starts to deviate when the holding period increases to one month. Empirical evidence suggests that bear (short) ETFs deviate from their target return more quickly than their bull (long) counterparts as the holding period lengthens. A possible explanation for this is that transaction costs, which are related to daily re-balancing activity, are higher for bear funds. When comparing the daily performance of European vs American funds, the authors find them both to be equally efficient in replicating their benchmarks, although European leveraged ETFs are much smaller in their Assets Under Management (AUM) compared to US LETFs.

This paper explores the application of the Risk Parity methodology to portfolios constructed using Exchange-Traded Funds (ETFs). In the world where the market is becoming more and more global, it is becoming more dynamic in terms of portoflio recalibrations, bringing resilience in terms of values. In other words, is it important to consider only a short holding period, and adapt the asset allocationn. In opposition to typical capital-weighted techniques, risk parity reallocates portfolio weights to ensure that each asset contributes an equal amount of risk. The study builds and assesses risk parity portfolios using ten assets that comprise the majority of the EA Bridgeway Blue Chip ETF (BBLU). The process entails assessing the volatilities and correlations of specific ETFs, adjusting portfolio weights to balance risk contributions, and back testing performance under different market scenarios. Empirical data shows that risk parity portfolios outperform standard allocation approaches in terms of diversification, drawdowns, and the stability of risk-adjusted returns. This research illustrates Risk Parity's potential as a strong framework for managing ETF portfolios in both institutional and individual investing settings.