IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v24y2023i2d10.1057_s41260-022-00287-9.html
   My bibliography  Save this article

How precisely European equity ETFs mirror their flagship benchmarks? Evidence from funds replicating performance of Euro Stoxx 50 Index

Author

Listed:
  • Ewa Feder-Sempach

    (University of Lodz)

  • Tomasz Miziołek

    (University of Lodz)

Abstract

The main goal of the article is to examine the tracking efficiency of a homogenous sample of 14 ETFs listed on European exchanges, replicating the performance of Euro Stoxx 50 Index—a benchmark index for blue chips from the euro area. This study provides some insights into the tracking quality of European ETFs over the long time horizon (2012–2021 period) including data from entire business cycle: both economic prosperity and COVID-19 crisis. The study has been made applying different tracking error calculation techniques and return intervals—daily, weekly and monthly. Passive investing may be a highly desirable, cheap and accurate method for long or short term investments in the largest 50 cap companies in the euro zone. Hence, this unique research may help to succeed in ETF selection process. The study reveals that ETFs are very effectively managed by keeping the TEs below 0.3% (for ETFs with accumulating share classes) and below 1% (for ETFs with distributing share classes). This shows that the ETFs with accumulating share classes perform much better—the average TE for three different methods is 0.11% for accumulating share classes ETFs and 0.33% for distributing share classes ETFs. It proofs, that it is not important whether to use the standard deviation of the difference between the return of an ETF and that of its benchmark index, or the standard error of regression in TE assessment, both methods give very similar results. However, TE calculation method signifies, if the average of the absolute difference between the return of an ETF and that of the index is used. Additionally, it is found that time intervals used in TE calculations matter—the shift from monthly to daily intervals results in reduction of TE levels. Using shorter intervals brings lower TE values of European ETFs.

Suggested Citation

  • Ewa Feder-Sempach & Tomasz Miziołek, 2023. "How precisely European equity ETFs mirror their flagship benchmarks? Evidence from funds replicating performance of Euro Stoxx 50 Index," Journal of Asset Management, Palgrave Macmillan, vol. 24(2), pages 121-135, March.
    • Handle: RePEc:pal:assmgt:v:24:y:2023:i:2:d:10.1057_s41260-022-00287-9
    DOI: 10.1057/s41260-022-00287-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-022-00287-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-022-00287-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hassine, Marlène & Roncalli, Thierry, 2013. "Measuring Performance of Exchange Traded Funds," MPRA Paper 44298, University Library of Munich, Germany.
    2. Jun Chen & Yi Chen & Bart Frijns, 2017. "Evaluating the tracking performance and tracking error of New Zealand exchange traded funds," Pacific Accounting Review, Emerald Group Publishing Limited, vol. 29(3), pages 443-462, August.
    3. David Easley & David Michayluk & Maureen O’Hara and Tālis & J Putniņš, 2021. "The Active World of Passive Investing [Mutual fund’s R2 as predictor of performance]," Review of Finance, European Finance Association, vol. 25(5), pages 1433-1471.
    4. Baş, Nazlı Kalfa & Sarıoğlu, Serra Eren, 2015. "Tracking Ability and Pricing Efficiency of Exchange Traded Funds: Evidence from Borsa Istanbul," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 6(1), pages 19-33, January.
    5. Gerasimos G Rompotis, 2012. "The German Exchange Traded Funds," The IUP Journal of Applied Finance, IUP Publications, vol. 18(4), pages 62-82, October.
    6. Aftab Parvez Khan & Obiyathulla Ismath Bacha & Abul Mansur Mohammed Masih, 2015. "Performance and Trading Characteristics of Exchange Traded Funds: Developed vs Emerging Markets," Capital Markets Review, Malaysian Finance Association, vol. 23(1&2), pages 40-64.
    7. repec:eme:mfppss:v:38:y:2012:i:9:p:804-832 is not listed on IDEAS
    8. repec:eme:par000:par-10-2016-0089 is not listed on IDEAS
    9. Edwin J. Elton, 2002. "Spiders: Where Are the Bugs?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 453-472, July.
    10. James M. Poterba & John B. Shoven, 2002. "Exchange-Traded Funds: A New Investment Option for Taxable Investors," American Economic Review, American Economic Association, vol. 92(2), pages 422-427, May.
    11. Shin, Sangheon & Soydemir, Gökçe, 2010. "Exchange-traded funds, persistence in tracking errors and information dissemination," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 214-234, December.
    12. Blitz, David & Huij, Joop, 2012. "Evaluating the performance of global emerging markets equity exchange-traded funds," Emerging Markets Review, Elsevier, vol. 13(2), pages 149-158.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Damien Kunjal & Faeezah Peerbhai & Paul-Francois Muzindutsi, 2021. "The performance of South African exchange traded funds under changing market conditions," Journal of Asset Management, Palgrave Macmillan, vol. 22(5), pages 350-359, September.
    2. Perera, Devmali & Białkowski, Jędrzej & Bohl, Martin T., 2022. "Is the tracking error time-varying? Evidence from agricultural ETCs," Research in International Business and Finance, Elsevier, vol. 63(C).
    3. Prabhdeep Kaur & Jaspal Singh & Sidharath Seth, 2021. "Investigating the Dynamics of Exchange Traded Funds Across the Bear and Bull Markets: Evidence from Indian Equity ETFs," Vision, , vol. 25(3), pages 350-360, September.
    4. Dobson, Peter, 2020. "ETFs tracking errors on global markets with consideration of regional diversity," MPRA Paper 103695, University Library of Munich, Germany.
    5. Czereszenko, Witalij, 2021. "Pursuing the aim of Exchange Traded Funds at the time of Covid-19," MPRA Paper 111319, University Library of Munich, Germany.
    6. Priya Malhotra & Pankaj Sinha, 2023. "Exchange-traded Funds in India Amid COVID-19 Crisis: An Empirical Analysis of the Performance," Metamorphosis: A Journal of Management Research, , vol. 22(1), pages 38-54, June.
    7. Charteris, Ailie & Chau, Frankie & Gavriilidis, Konstantinos & Kallinterakis, Vasileios, 2014. "Premiums, discounts and feedback trading: Evidence from emerging markets' ETFs," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 80-89.
    8. Hilliard, Jitka, 2014. "Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds," Global Finance Journal, Elsevier, vol. 25(2), pages 90-107.
    9. S. Narend & M. Thenmozhi, 2016. "What drives fund flows to index ETFs and mutual funds? A panel analysis of funds in India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(1), pages 17-30, March.
    10. Jaspal Singh & Prabhdeep Kaur, 2016. "Tracking Efficiency of Exchange Traded Funds (ETFs)," Paradigm, , vol. 20(2), pages 176-190, December.
    11. Kent T. Saunders, 2018. "Analysis of International ETF Tracking Error in Country-Specific Funds," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(2), pages 151-160, June.
    12. António Afonso & Pedro Cardoso, 2017. "Exchange-traded Funds as an Alternative Investment Option: a Case Study," Working Papers REM 2017/22, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    13. Devmali Perera & Jędrzej Białkowski & Martin T. Bohl, 2022. "Is the Tracking Error Time-Varying? Evidence from Agricultural ETCs," Working Papers in Economics 22/13, University of Canterbury, Department of Economics and Finance.
    14. David Blitz & Joop Huij & Laurens Swinkels, 2012. "The Performance of European Index Funds and Exchange†Traded Funds," European Financial Management, European Financial Management Association, vol. 18(4), pages 649-662, September.
    15. Stewart, Shamar L. & Massa, Olga Isengildina & Hassman, Colburn & Leon, Maximo de, 2023. "ETP tracking of U.S. agricultural and energy markets," Journal of Commodity Markets, Elsevier, vol. 31(C).
    16. Isengildina Massa, Olga & Stewart, Shamar & Hassman, Colburn H., 2021. "RETURN DIVERGENCE IN COMMODITY ETFs: NATURE AND CAUSES," 2021 Annual Meeting, August 1-3, Austin, Texas 313896, Agricultural and Applied Economics Association.
    17. Gregor Dorfleitner & Anna Gerl & Johannes Gerer, 2018. "The pricing efficiency of exchange-traded commodities," Review of Managerial Science, Springer, vol. 12(1), pages 255-284, January.
    18. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    19. Elton, Edwin J. & Gruber, Martin J. & de Souza, Andre, 2019. "Passive mutual funds and ETFs: Performance and comparison," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 265-275.
    20. Stephanie E. Lang & Klaus Röder, 2008. "Die Kosten des Indextrackings — Eine Fallstudie über den Exchange Traded Fund DAX®EX," Schmalenbach Journal of Business Research, Springer, vol. 60(3), pages 298-321, May.

    More about this item

    Keywords

    Exchange-traded funds (ETFs); Euro Stoxx 50 Index; Tracking efficiency; Tracking error;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:24:y:2023:i:2:d:10.1057_s41260-022-00287-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.