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Effects of size on the exchange-traded funds performance

Author

Listed:
  • Kiran Paudel

    (University of New Orleans)

  • Atsuyuki Naka

    (University of New Orleans)

Abstract

This study investigates the effects of size on the risk-adjusted fund performance of US-publicly listed index-tracking passive equity exchange-traded funds (ETFs). Using panel quantile and Fama–MacBeth cross-sectional regression approaches, we determine that the asset-based size growth is informative in the risk-return trade-offs of ETFs, and that these ETFs do not follow a constant return-to-scale. The quantile regression results show that the rate of return-to-scale diminishes as the ETFs size increases and becomes negative for the most significant fund group. The size has a considerably substantial negative impact on the highest-performing clusters of ETFs, suggesting that the diseconomies of scale found in conventional active mutual funds affect the ETFs. The results align with Indro et al. (Financ Anal J 55: 74–87, 1999) findings of mutual funds that there are diminishing marginal returns to information acquisition and trading, and the marginal returns become negative when the fund exceeds its optimal size. This study provides further insights and understanding of the performance and size relationship of index-tracking passive equity ETFs.

Suggested Citation

  • Kiran Paudel & Atsuyuki Naka, 2023. "Effects of size on the exchange-traded funds performance," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 474-484, October.
    • Handle: RePEc:pal:assmgt:v:24:y:2023:i:6:d:10.1057_s41260-023-00321-4
    DOI: 10.1057/s41260-023-00321-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange-traded funds; Panel quantile regression; Index-tracking funds; Asset size; Scale economies; Risk-adjusted alpha;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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