On the Performance of Fixed Income Exchange Traded Funds

The Journal of Index Investing, Summer 2012, Vol. 3, No. 1: pp. 39-44

13 Pages Posted: 14 May 2011 Last revised: 30 May 2012

Date Written: August 8, 2011

Abstract

We evaluate the performance of fixed income Exchange Traded Funds (ETFs). We find that Treasury ETFs are indeed able to track their benchmarks, but that Investment Grade corporate bond ETFs underperform their benchmarks and High Yield corporate bond ETFs even severely underperform their benchmarks. We provide evidence that the transaction costs of the underlying bonds are a key determinant of an ETF’s underperformance. We conclude that indexes consisting of bonds that are more costly to trade are more difficult to track.

Keywords: ETFs, passive investing, index tracking, fixed income, Treasury bonds, corporate bonds, performance evaluation

JEL Classification: G11, G14, G15

Suggested Citation

Houweling, Patrick, On the Performance of Fixed Income Exchange Traded Funds (August 8, 2011). The Journal of Index Investing, Summer 2012, Vol. 3, No. 1: pp. 39-44, Available at SSRN: https://ssrn.com/abstract=1840559 or http://dx.doi.org/10.2139/ssrn.1840559

Patrick Houweling (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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