A Cost-Performance Analysis of Exchange Traded Funds: Evidence from Ishares
28 Pages Posted: 14 Dec 2006
Date Written: December 2006
In this paper we perform a cost-performance investigation of a sample of 74 iShares ETFs during the period 2002-06. We first find that expenses are negatively related to the size of iShares reflecting the existence of economies of scale that could decrease the total costs of iShares. We also demonstrate that the aged iShares encumber investors with greater expenses. Further research reveals that the performance of iShares is affected negatively by expenses and positively by turnover. Additionally, we apply a return/cost based rating of iShares finding that the highly ranked iShares present the highest return but not necessarily the lowest expense ratios. By regression analysis we find that the expense ratios strongly persist both in short and long-run period but the performance and the rating partially persist only in the long-run basis. Finally, we evaluate the ability of iShares rating within a year to forecast their performance in the subsequent periods finding that the rating predicts positively the return of the bottom classes only in the short-run period but forecasts negatively the performance of the median and the bottom classes in the long-run period.
JEL Classification: G11, G15
Suggested Citation: Suggested Citation