The Performance of Exchange-Traded Funds
21 Pages Posted: 6 Oct 2019
Date Written: September 23, 2019
Exchange-traded funds (ETFs) are commonly regarded as an efficient, low-cost alternative to actively managed mutual funds, yet their perceived superiority is largely anecdotal. We evaluate the performance of a comprehensive, survivorship bias-free sample of US equity ETFs following the same approach that has been commonly used to evaluate the performance of actively managed mutual funds. We find that ETFs have collectively lagged the market by an amount that appears similar to the widely documented underperformance of active mutual funds. We perform textual and regression-based analysis to identify factor ETFs and show that most of these have also failed to beat the market. We conclude that, from a pure performance perspective, the allure of ETFs finds little support in the data.
Keywords: mutual fund performance, exchange-traded funds, ETFs, smart beta, factor investing, factor premiums, active versus passive, market efficiency
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation