Exchange-Traded Funds, Persistence in Tracking Errors and Information Dissemination
35 Pages Posted: 30 Jul 2011
Date Written: 2010
Abstract
We estimate tracking errors from 26 exchange-traded funds (ETFs) utilizing three different methods and test their relative performance using Jensen’s model. We find that tracking errors are significantly different from zero and display persistence. Based on Jensen’s alpha, risk adjusted returns are significantly inferior to benchmark returns for all ETFs with two exceptions at conventional significance levels revealing that passive investment strategy does not outperform market returns. We then examine the degree to which frequently used factors such as expense ratio, dividends, exchange rate and spreads of trading prices may be underlying sources of tracking errors causing this underperformance. We find that the change in the exchange rate is a significant source of tracking errors. Our serial correlation test, runs test and panel regression analysis reveal that Asian markets display relatively greater persistence and therefore are less efficient in disseminating information and noisier in filtering the information contained in returns.
Keywords: Exchange-Traded Funds,Tracking Errors, Persistence
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
What are Stock Investors' Actual Historical Returns? Evidence from Dollar-Weighted Returns
-
A Quantitative Approach to Tactical Asset Allocation
By Meb Faber
-
A Closer Look at Stable Value Funds Performance
By David F. Babbel and Miguel Herce
-
Dollar-Weighted Returns to Stock Investors: A New Look at the Evidence
By Aneel Keswani and David Stolin
-
Stable Value Funds: Performance from 1973 Through 2008
By David F. Babbel and Miguel Herce
-
Value Averaging and How Dynamic Strategies Bias the IRR and Modified IRR
By Simon Hayley
-
The Real-Life Performance of Market Timing with Moving Average and Time-Series Momentum Rules
-
Stable Value Funds: Performance to Date
By David F. Babbel and Miguel Herce
-
Measuring Investors' Historical Returns: Hindsight Bias in Dollar-Weighted Returns
By Simon Hayley