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

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  • Alex Frino
  • David R. Gallagher

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.

Suggested Citation

  • Alex Frino & David R. Gallagher, 2002. "Is Index Performance Achievable? An Analysis of Australian Equity Index Funds," Abacus, Accounting Foundation, University of Sydney, vol. 38(2), pages 200-214, June.
    • Handle: RePEc:bla:abacus:v:38:y:2002:i:2:p:200-214
    DOI: 10.1111/1467-6281.00105
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    3. Amir Rezaee, 2006. "La mesure de performance de la gestion indicielle française," Working Papers halshs-00008393, HAL.
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    6. Peter Dunn & Scott Francis & Jason Hall, 2009. "Leveraged superannuation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(3), pages 505-529, September.
    7. Jaspal Singh & Prabhdeep Kaur, 2016. "Tracking Efficiency of Exchange Traded Funds (ETFs)," Paradigm, , vol. 20(2), pages 176-190, December.
    8. Hallahan, Terrence & Faff, Robert, 2009. "Tournament behavior in Australian superannuation funds: A non-parametric analysis," Global Finance Journal, Elsevier, vol. 19(3), pages 307-322.

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