IDEAS home Printed from https://ideas.repec.org/p/ise/remwps/wp0222017.html
   My bibliography  Save this paper

Exchange-traded Funds as an Alternative Investment Option: a Case Study

Author

Listed:
  • António Afonso
  • Pedro Cardoso

Abstract

We conduct an analysis of Exchange-traded Funds (ETFs), Index and Equity mutual funds and their respective benchmark during the 2010-2015 period for the Portuguese fund industry. For the period 2010-2017 we test ETFs for price inefficiency (existence of deviations between prices and the Net Asset Value) and persistence. We find that ETF do not always outperform index funds in replicating the variations of the PSI 20 index, despite exhibiting better tracking ability when facing downside deviations of the benchmark and a better capacity of smoothing tracking deviations. Regarding ETFs price efficiency and its persistence, the study reveals that the analyzed ETF is priced at a low average discount with evidence of deviations persistence of at least two days. The investment schemes with the highest ability to track the PSI 20 Index were PSI20 (ETF), BBVA PPA Índice PSI20, and the equity mutual fund BPI Portugal.

Suggested Citation

  • 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.
    • Handle: RePEc:ise:remwps:wp0222017
    as

    Download full text from publisher

    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_022_2017.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, May.
    2. 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.
    3. Xu, Liao & Yin, Xiangkang, 2017. "Does ETF trading affect the efficiency of the underlying index?," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 82-101.
    4. Agapova, Anna, 2011. "Conventional mutual index funds versus exchange-traded funds," Journal of Financial Markets, Elsevier, vol. 14(2), pages 323-343, May.
    5. 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.
    6. Gerasimos G. Rompotis, 2011. "Predictable patterns in ETFs' return and tracking error," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(1), pages 14-35, March.
    7. Gerasimos G. Rompotis, 2011. "ETFs vs. Mutual Funds: Evidence from the Greek Market," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 9(1), pages 67-84.
    8. 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.
    9. 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.
    10. Karen Wong & Wai Cheong Shum, 2010. "Exchange-traded funds in bullish and bearish markets," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1615-1624.
    11. Kearney, Fearghal & Cummins, Mark & Murphy, Finbarr, 2014. "Outperformance in exchange-traded fund pricing deviations: Generalized control of data snooping bias," Journal of Financial Markets, Elsevier, vol. 19(C), pages 86-109.
    12. Ching-Chung Lin & Shih-Ju Chan & Hsinan Hsu, 2006. "Pricing efficiency of exchange traded funds in Taiwan," Journal of Asset Management, Palgrave Macmillan, vol. 7(1), pages 60-68, May.
    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. Jaspal Singh & Prabhdeep Kaur, 2016. "Tracking Efficiency of Exchange Traded Funds (ETFs)," Paradigm, , vol. 20(2), pages 176-190, December.
    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. Marszk, Adam & Lechman, Ewa, 2021. "Reshaping financial systems: The role of ICT in the diffusion of financial innovations – Recent evidence from European countries," Technological Forecasting and Social Change, Elsevier, vol. 167(C).
    7. Kim, Jinhwan & Cho, Hoon & Seok, Sangik, 2023. "Liquidity risk, return performance, and tracking error: Synthetic vs. Physical ETFs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    8. Xu, Liao & Yin, Xiangkang & Zhao, Jing, 2019. "The sidedness and informativeness of ETF trading and the market efficiency of their underlying indexes," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    9. Carlos Manuel Pinheiro & Hugo Hilário Varela, 2018. "Do Exchange Traded Funds (ETFs) Outperform the Market? Evidence from the Portuguese Stock Index," GEE Papers 0109, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Sep 2018.
    10. 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.
    11. Lechman, Ewa & Marszk, Adam, 2015. "ICT technologies and financial innovations: The case of exchange traded funds in Brazil, Japan, Mexico, South Korea and the United States," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 355-376.
    12. R. Shanmugham & Zabiulla, 2012. "Pricing Efficiency of Nifty BeES in Bullish and Bearish Markets," Global Business Review, International Management Institute, vol. 13(1), pages 109-121, February.
    13. 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).
    14. 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.
    15. 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.
    16. David Puelz & Carlos M. Carvalho & P. Richard Hahn, 2015. "Optimal ETF Selection for Passive Investing," Papers 1510.03385, arXiv.org, revised Nov 2015.
    17. Rakowski, David & Shirley, Sara, 2020. "What drives the market for exchange-traded notes?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    18. Tang, Lu & Tan, Eric K.M. & Low, Rand, 2024. "Complements or substitutes? The effect of ETFs on other managed funds," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    19. 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.
    20. 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.

    More about this item

    Keywords

    Exchange-traded fund; Mutual fund; Performance evaluation; Tracking error; Price efficiency;
    All these keywords.

    JEL classification:

    • 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

    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:ise:remwps:wp0222017. 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: Sandra Araújo (email available below). General contact details of provider: https://rem.rc.iseg.ulisboa.pt/ .

    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.