Is Index Performance Achievable? An Analysis of Australian Equity Index Funds

15 Pages Posted: 23 Dec 2002

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

David R. Gallagher

Rozetta Institute

Abstract

This article examines the performance of index equity funds in Australia. Despite the significant growth in index funds since 1976, when the first index mutual fund was launched in the U.S., research on their performance is sparse in the U.S. and non-existent in Australia. This study documents the existence of significant tracking error for Australian index funds. For example, the magnitude of the difference between index fund returns and index returns averages between 7.4 and 22.3 basis points per month across index funds operating for more than five years. However, there is little evidence of bias in tracking error implying that these funds neither systematically outperform nor underperform their benchmark on a before cost basis. Further analysis provides evidence that the magnitude of tracking error is related to fund cash flows, market volatility, transaction costs and index replication strategies used by the manager.

Keywords: benchmark index, index fund, investment performance, tracting error

Suggested Citation

Frino, Alex and Gallagher, David R., Is Index Performance Achievable? An Analysis of Australian Equity Index Funds. Abacus, Vol. 38, No. 2, pp. 200-214, 2002, Available at SSRN: https://ssrn.com/abstract=320405

Alex Frino (Contact Author)

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

David R. Gallagher

Rozetta Institute ( email )

Sydney

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