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No Need to Choose: ETFs Excess Return Versus Risk Adjusted Excess Return

Year 2013, Volume: 2 Issue: 2, 43 - 55, 01.06.2013

Abstract

In this paper,Exchange Traded Funds (ETFs) performance estimated via excess return is compared with their performance estimated via risk adjusted excess return, both are measured relative to the underlying index performance. The analysis of88 ETFs in 2000-2012implies that there is a wide agreement between these two measures of ETFs performance. Previous research suggests that 1, as extracted from the regression of the ETFs return on their underlying index return,is a significant predictor of ETFs’ risk adjusted excess return. The analysis results suggest that 1 also successfully identifies ETFs that achieve positive excess returns.

References

  • Ackert, L. and Tian, Y. (2008), Arbitrage, Liquidity, and the Valuation of Exchange Traded
  • Funds, Financial Markets, Institutions and Instruments. Vol. 17, p. 331-362. Amihud, Y. and Goyenko, R. (2012), Mutual Fund as a Predictor of Performance, Working paper, New York University.
  • Blume, M., and Edelen, R. (2004), S&P 500 Indexers, Tracking Error, and Liquidity, Journal of
  • Portfolio Management.Vol. 30, p. 37-46. Brands, S., Brown, S.J., and Gallagher, D.R. (2005), Portfolio Concentration and Investment
  • Manager Performance, International Review of Finance. Vol. 5, p. 149-174. Cremers, M., Ferreira, M., Matos, P., and Starks, L. (2011), The Mutual Fund Industry
  • Worldwide: Explicit and Closet Indexing, Fees, and Performance, Working paper. Cremers, M. and Petajisto, A. (2009), How Active Is Your Fund Manager? A New Measure That
  • Predicts Performance, Review of Financial Studies. Vol. 22, p. 3329-3365.
  • Daniel, K., Grinblatt, M., Titman, S., and Wermers, R. (1997), Measuring Mutual Fund
  • Performance With Characteristic-Based Benchmarks, Journal of Finance. Vol. 52, p. 1035-1058.
  • Elton, E., Gruber, M., Comer, G., and Li, K. (2002), Spiders: Where are the Bugs? Journal of Business. Vol. 75, p. 453-472.
  • Ferson, W. and Mo, H. (2012), Performance Measurement with Market and Volatility Timing and Selectivity, Working paper, University of Southern California.
  • Frino, A., and Gallagher, R. (2001), Tracking S&P 500 Index Funds, Journal of Portfolio Management. Vol. 28, p. 44-55.
  • Frino, A., Gallagher, R., and Oetomo, T.N. (2005), The Index Tracking Strategies of Passive and Enhanced Index Equity Funds, Australian Journal of Management. Vol. 30, p. 23–56.
  • Garyn-Tal, S. (2013), Explaining and Predicting ETFs Alphas: The R Methodology, Forthcoming, Journal of Index Investing.
  • Kacperczyk, M. and Seru, A. (2007), Fund Manager Use of Public Information: New Evidence on Managerial Skills, Journal of Finance. Vol. 62, p. 485-528.
  • Kacperczyk, M., Sialm, C., and Zheng, L. (2005), On Industry Concentration of Actively Managed Equity Mutual Funds, Journal of Finance. Vol. 60, p. 1983-2011.
  • Rompotis, G.G. (2011), Predictable Patterns in ETFs' Return and Tracking Error, Studies in
  • Economics and Finance. Vol. 28, p. 14-35. Sun, Z., Wang, A., and Zheng, L. (2012), The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance, Review of Financial Studies. Vol. 25, p. 96-143.
  • Titman, S. and Tiu, C. (2011), Do the Best Hedge Funds Hedge? Review of Financial Studies. Vol. 24, p. 123-168.
  • Wong, K.H.Y. and Shum, W.C. (2010), Exchange-Traded Funds in Bullish and Bearish Markets, Applied Economics Letters. Vol. 17, p. 1615-1624.
Year 2013, Volume: 2 Issue: 2, 43 - 55, 01.06.2013

Abstract

References

  • Ackert, L. and Tian, Y. (2008), Arbitrage, Liquidity, and the Valuation of Exchange Traded
  • Funds, Financial Markets, Institutions and Instruments. Vol. 17, p. 331-362. Amihud, Y. and Goyenko, R. (2012), Mutual Fund as a Predictor of Performance, Working paper, New York University.
  • Blume, M., and Edelen, R. (2004), S&P 500 Indexers, Tracking Error, and Liquidity, Journal of
  • Portfolio Management.Vol. 30, p. 37-46. Brands, S., Brown, S.J., and Gallagher, D.R. (2005), Portfolio Concentration and Investment
  • Manager Performance, International Review of Finance. Vol. 5, p. 149-174. Cremers, M., Ferreira, M., Matos, P., and Starks, L. (2011), The Mutual Fund Industry
  • Worldwide: Explicit and Closet Indexing, Fees, and Performance, Working paper. Cremers, M. and Petajisto, A. (2009), How Active Is Your Fund Manager? A New Measure That
  • Predicts Performance, Review of Financial Studies. Vol. 22, p. 3329-3365.
  • Daniel, K., Grinblatt, M., Titman, S., and Wermers, R. (1997), Measuring Mutual Fund
  • Performance With Characteristic-Based Benchmarks, Journal of Finance. Vol. 52, p. 1035-1058.
  • Elton, E., Gruber, M., Comer, G., and Li, K. (2002), Spiders: Where are the Bugs? Journal of Business. Vol. 75, p. 453-472.
  • Ferson, W. and Mo, H. (2012), Performance Measurement with Market and Volatility Timing and Selectivity, Working paper, University of Southern California.
  • Frino, A., and Gallagher, R. (2001), Tracking S&P 500 Index Funds, Journal of Portfolio Management. Vol. 28, p. 44-55.
  • Frino, A., Gallagher, R., and Oetomo, T.N. (2005), The Index Tracking Strategies of Passive and Enhanced Index Equity Funds, Australian Journal of Management. Vol. 30, p. 23–56.
  • Garyn-Tal, S. (2013), Explaining and Predicting ETFs Alphas: The R Methodology, Forthcoming, Journal of Index Investing.
  • Kacperczyk, M. and Seru, A. (2007), Fund Manager Use of Public Information: New Evidence on Managerial Skills, Journal of Finance. Vol. 62, p. 485-528.
  • Kacperczyk, M., Sialm, C., and Zheng, L. (2005), On Industry Concentration of Actively Managed Equity Mutual Funds, Journal of Finance. Vol. 60, p. 1983-2011.
  • Rompotis, G.G. (2011), Predictable Patterns in ETFs' Return and Tracking Error, Studies in
  • Economics and Finance. Vol. 28, p. 14-35. Sun, Z., Wang, A., and Zheng, L. (2012), The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance, Review of Financial Studies. Vol. 25, p. 96-143.
  • Titman, S. and Tiu, C. (2011), Do the Best Hedge Funds Hedge? Review of Financial Studies. Vol. 24, p. 123-168.
  • Wong, K.H.Y. and Shum, W.C. (2010), Exchange-Traded Funds in Bullish and Bearish Markets, Applied Economics Letters. Vol. 17, p. 1615-1624.
There are 20 citations in total.

Details

Journal Section Articles
Authors

Sharon Garyn-tal This is me

Publication Date June 1, 2013
Published in Issue Year 2013 Volume: 2 Issue: 2

Cite

APA Garyn-tal, S. (2013). No Need to Choose: ETFs Excess Return Versus Risk Adjusted Excess Return. Journal of Business Economics and Finance, 2(2), 43-55.

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