Abstract
This article investigates the performance and risk characteristics of ETFs and index funds. The findings reveal that ETFs and index funds deliver similar average daily returns while ETFs are slightly more risky than index funds. The average beta of ETFs is statistically different from unity reflecting the non-full replication strategies applied by ETFs while the average beta of index funds does not differ statistically from unity. As a result, the average tracking error of ETFs is superior to the average tracking error of index funds. In cross-sectional regression analysis we find that the tracking error of both ETFs and index funds is positively related to expense ratio and risk. Overall, the results indicate that the trading convenience and the unique characteristics related to ETFs do not result in better performance in relation to the index funds' performance.
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