Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs

50 Pages Posted: 17 Jul 2020 Last revised: 13 Jul 2021

See all articles by Elias Cavalcante Filho

Elias Cavalcante Filho

Fernando Moraes

Insper

Rodrigo De-Losso

University of São Paulo (USP) - Department of Economics

Date Written: March 31, 2021

Abstract

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)).

Keywords: Mutual funds, performance measures, ETF, risk factors.

JEL Classification: G11, G2, G23.

Suggested Citation

Cavalcante Filho, Elias and Tassinari Moraes, Fernando and De-Losso, Rodrigo, Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3634701 or http://dx.doi.org/10.2139/ssrn.3634701

Elias Cavalcante Filho (Contact Author)

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Av. Prof. Luciano Gualberto 908
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Fernando Tassinari Moraes

Insper ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Rodrigo De-Losso

University of São Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-010
Brazil
551130930957 (Phone)

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