The Performance of European Index Funds and Exchange-Traded Funds
31 Pages Posted: 26 Jul 2009 Last revised: 18 May 2010
Date Written: July 24, 2009
European index funds and exchange-traded funds underperform their benchmarks by 50 to 150 basis points per annum. The explanatory power of dividend withholding taxes as a determinant of this underperformance is at least at par with fund expenses. Dividend taxes also explain performance differences between funds that track different benchmarks and time variation in fund performance. Our results imply that not only fund expenses, but also dividend taxation can result in a substantial drag on the performance of mutual funds.
Keywords: passive investing, index fund, ETF, dividend taxes, performance evaluation
JEL Classification: G11, G14, G19
Suggested Citation: Suggested Citation