Exchange Traded Funds: Performance and Competition

28 Pages Posted: 19 Nov 2008

See all articles by Marko Svetina

Marko Svetina

University of San Diego

Sunil Wahal

Arizona State University (ASU) - Finance Department

Date Written: November 18, 2008

Abstract

We study 584 domestic equity, international equity, and fixed income exchange traded funds from their inception to the end of 2007. There is enormous heterogeneity in this population in the use of different types of indices, degree of passivity, segment of the market tracked, and use of leverage. Almost 83 percent of all ETFs track indices that are not directly investable through index mutual funds, many of which represent narrow segments of the market. On average, ETFs underperform their benchmark indices and are not immune from tracking error. Only 17 percent of all ETFs directly compete with index funds; those that do, provide returns that are, for the most part, statistically indistinguishable from those provided by matched index funds. The creation of new competing ETFs reduces flows for incumbent index funds and reduces market share of incumbent ETFs in the same investment style.

Keywords: Exchange traded funds, index mutual funds, financial innovation

JEL Classification: G23

Suggested Citation

Svetina, Marko and Wahal, Sunil, Exchange Traded Funds: Performance and Competition (November 18, 2008). Available at SSRN: https://ssrn.com/abstract=1303643 or http://dx.doi.org/10.2139/ssrn.1303643

Marko Svetina (Contact Author)

University of San Diego ( email )

School of Business Administration
5998 Alcalá Park
San Diego, CA 92110
United States
(619) 260-4869 (Phone)
(619) 260-4891 (Fax)

Sunil Wahal

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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