Gerasimos G. Rompotis

The Performance of Actively Managed Exchange-Traded Funds

Several issues concerning the performance of the U.S.-listed actively managed exchange-traded funds (ETFs) are investigated in this article. The return and risk of this new type of ETF are examined in comparison to the return and risk of the market, represented by the S&P 500 Index. The results indicate that there is no significant difference between them. A single-index regression analysis (CAPM) shows that the managers of active ETFs fail to deliver any significant excess return (alpha) with respect to the market return. This failure is also verified both by the Fama and French three-factor pricing model and the augmented Fama and French four-factor pricing model. In addition, these two models reveal the lack of any solid effect on the performance of active ETFs exerted by factors such as stock capitalization, book-to-price ratio, and momentum. A performance evaluation of ETFs and the index via the Sharpe, Sortino, and Treynor ratios follows. The results of this evaluation re-confirm the lack of any material difference between the performance of active ETFs and the market. The last topic examined concerns the timing skills of active ETF managers. Both the Treynor and Mazuy and the Henriksson and Merton models employed indicate that the managers do not possess any substantive ability to efficiently time the market.

A Survey on Leveraged and Inverse Exchange-Traded Funds

Leveraged and inverse ETFs, which promise to deliver two or three times the return of a specified benchmark (in a positive or a negative fashion) on a daily basis, have become a fast-growing innovation in the ETF industry. In this article, a sample of 40 inverse and 28 leveraged ETFs belonging to Proshares family is examined to see how frequently these ETF types deliver their stated multiple, finding that they basically fail to meet their daily target. We then search whether there is any significant day-of-the-week effect on the effort of Proshares to achieve their investment goal. The results indicate that the discrepancy between the actual return and the predefined multiple is smaller on Wednesday. In the last step, we compare Proshares to regular ETFs tracking the same indexes, at first taking into account the daily volume, trading frequency, and expense ratios. The results demonstrate that the leveraged ETF market is less liquid than the regular ETF market (less volume and trading frequency) while the leveraged and inverse ETFs are more expensive than their regular counterparts. Secondly, we compare return and risk of Proshares and regular ETFs, taking into consideration the return and risk of the indexes as well. The findings show that, on average, the inverse ETFs underperform their regular ETF competitors and the corresponding indexes while they are more risky than them. On the other hand, the results of the study provide weak evidence that the leveraged ETFs, on average, outperform the regular ETFs and the indexes but they are more hazardous.

Dual Offerings of ETFs on the Same Stock Index: U.S. vs. Swiss ETFs

According to the law of one price, two identical securities traded in different places at the same time should command the same price. This law applies not only on original securities but on any other synthetic, derivative, or portfolio of securities. In particular, with regard to multiple offerings of the same security this law further implies that their returns should be similar for all investors as long as differential transaction costs are not imposed. Differences in transaction cost lead investors to abandon the overvalued securities in favor of the undervalued ones causing the extinction of the former. This article examines the characteristics of numerous pairs of U.S. and Swiss ETFs written on the same stock index. Focusing on the institutional characteristics of the U.S. and Swiss markets the authors show that expense ratio, volume of trading, and trading frequency differ markedly between the two markets. The results also show that the U.S. ETF market dominates the Swiss ETF market in all cases in the sample. This finding supports the argument that dual or multiple offerings originated in countries with differences in institutional characteristics, in currencies, and in time zones are likely to differ.

A Study on the Third-Generation Exchange-TradedFunds: The Case of Short ETFs

In this article, Rompotis investigates the third generation of exchange-traded funds (ETFs) using data from a sample of 37 so-called short ETFs, which seek to achieve two or three times the return of an index in a negative fashion on a daily basis. Various issues concerning short ETFs are examined. In particular, emphasis is given to the ability of these ETFs to meet their daily investment target. In this respect, an average deviation from the daily target amounting to -0.034% is computed. Applying a classification to the deviation from the daily return goal, Rompotis finds that for about 62% of the examined trading period’s duration the return of the average short ETF abstains from its target by a maximum rate of 0.5%, either below or above the target. Regression analysis applied to the deviation from the return target indicates that the lagged deviation is negatively related to the contemporary deviation. The last research issue regards the most profitable investment strategy that can adopted by an investor when deciding to choose from short ETFs, regular ETFs, and a hedging strategy, which invests 50% in short ETFs and 50% in regular ETFs. In any case, investing in regular ETFs is more profitable than the other two strategies. Nevertheless, investing in short ETFs or adopting the hedging strategy can be profitable for a sufficient number of times, thus being appropriate for investors having short-term horizons, while the hedging strategy considered mitigates the investment risk.

On the Trading Behavior of Emerging Market ETFs

Emerging market exchange-traded funds (ETFs) are the subject of the current article. In particular, a sample of 40 iShares listed in the United States and exposed to several emerging stock markets in the Americas, Europe, Asia, and South Africa is employed to study several issues surrounding the trading behavior of emerging market ETFs. The issues examined concern the behavior of their return and volatility during trading and nontrading hours; their performance relative to market performance; the correlation of emerging ETF returns with the stock market of the United States; their tracking error and the persistence in tracking error; the pricing inefficiencies in terms of deviations between the trading prices and net asset values of ETFs; the persistence in these inefficiencies, which may or may not be arbitrageable; the reaction implications for the pricing of ETFs due to the existence of these inefficiencies; and finally, the determinants of ETFs’ trading activity. The results are comprehensive and indicative of the trading behavior of U.S. ETFs invested in emerging market indexes covering the Americas, Europe, Asia, and South Africa.

The Seasonal Patterns in ETFs Performance, Volatility and Trading Activity

This paper investigates the seasonal characteristics of ETFs return, risk, tracking error and volume and reveals the existence of a strong November effect in performance. The paper also demonstrates the inexistence of any persistent and univocal January effect in ETFs performance. Considering the volatility and the tracking error of ETFs, the paper demonstrates that a semi-strong seasonality in risk of ETFs exists during November and that ETFs achieve their best replication performance in November too. The combination of high average performance and low average risk and tracking error signals an opportunity for investors to gain sufficient returns by exposing themselves in modest or low volatility and tracking failure. Also, a straightforward relationship among risk and tracking error is demonstrated by the paper. Finally, the study indicates that there is no a specific and stead monthly effect in ETFs trading activity but there is some evidence for the direct conjuncture among risk and volume. This positive connection is basically interpreted in selling of ETF shares when investors perceive that their investments are over risky.

The Performance of Swiss Exchange Traded Funds

In this paper, we study the performance and the trading characteristics of Swiss Exchange Traded Funds. The first finding is that the percentage returns of Swiss ETFs lag the performance of the underlying indexes, while they encumber investors with greater risk in comparison to the indexes. Consequently, we demonstrate that Swiss ETFs do not follow full replication strategies in regard to the components of the benchmark portfolios. Further, we estimate a significant tracking error considering the performance of ETFs, which is attributed to the non-full replication policy, the management fees, the inherent risk of investments on ETFs, which is connected to the market frictions and time delays, especially in the cases of ETFs that track non-European benchmarks. In parallel, we ascertain that the expenses affect negatively the performance and they are straightly correlated to the risk of ETFs. We also denote that the volume of Swiss ETFs depends on the intraday price volatility, the number of the executed orders and the trading frequency of ETFs. Finally, we find that Swiss ETFs are inferior to their US counterparts in regards of percentage return, risk, replication strategy, tracking error and volume.

A Performance Evaluation of the Canadian Actively Managed ETFs

This article offers new insights on the merits and the pitfalls of active portfolio management. The Canadian market of actively managed ETFs is the subject of this study. A sample of 22 funds is employed to examine some core issues concerning their performance versus the performance of relevant benchmarks. Standard methodology found in the respective financial literature on mutual funds and ETFs is used to examine the ability of these funds to add value to investors in Canadian ETFs (i.e., positive risk-adjusted netof-fee returns), in other words to assess whether the ETF managers possess material selection skills. The ability of the managers to time the market is evaluated too. The empirical findings are supportive of the ETFs’ failure to perform as they are supposed to. The majority of funds produce significantly negative alphas, whereas the managers of funds seem to be unable to time the market efficiently.

The performance of German fixed-income ETFs in the presence of the debt crisis

espanolLos bonos del Estado aleman atraen inversores en renta fija como si fueran un cielo seguro en el que se busca refugio de la degradada deuda publica de otros paises de la eurozona. Se aprovecha esta tendencia para diagnosticar el rendimiento de los fondos cotizados de renta fija alemana en linea con las oportunidades de inversion de los inversores en bonos. A partir de una muestra de 38 fondos cotizados de bonos alemanes durante el periodo comprendido entre su constitucion y diciembre de 2010, se encuentra que: 1) los mencionados fondos no proporcionan un rendimiento superior al del mercado, lo que persiste en una base trimestral; estan asociados con alfas negativos, 3) tamano pequeno y efecto momentum, y 4) un tracking error, estadisticamente significativo, del 0,06%, persistente en una base trimestral. En general, los resultados que se obtienen constituyen la primera evidencia empirica sobre el comportamiento de los fondos cotizados de bonos alemanes en relacion a los benchmarks o referencias, obteniendose que los inversores en renta fija que negocian con ellos deberian utilizar estrategias de asignacion para beneficiarse los efectos tamano y momentum encontrados en esta investigacion. EnglishThe German government bonds attract fixed income investors as a safe heaven seeking refuge from the downgraded debt of other Eurozone countries. We exploit this tendency to diagnose the performance behavior of German fixed income Exchange Traded Funds (hereafter ETFs) in line to investment opportunities facing bond investors. In a sample of 38 German bond ETFs during the period from their inception to the end of 2010, we find: 1) ETFs fail to deliver any positive excess return with respect to the market return and this persist on a quarterly basis, 2) ETFs are associated with negative alphas, 3) a small size and a momentum effect on bond ETF returns, and 4) a statistically significant tracking error of 0.06% which is persistent on a quarterly basis. Overall, our results provide the first empirical evidence on how German bond ETFs behave with respect to the benchmarks and imply that fixed income investors using German bond ETFs should apply allocation strategies to benefit from the size and momentum effects found

Can Greek Mutual Funds Managers Outguess the Market Persistently

This paper investigates the performance of Greek equity funds in the period 08/01/2005 - 08/23/2007 finding that funds deliver average daily percentage returns that move in line or are inferior to the return of benchmarks, being in parallel less risky than indexes. Also discovered that the funds do not produce significant abnormal risk-adjusted returns implying lack of stock picking skills by managers. Further research provides evidence for negative market timing performance related to the active management applied by managers, which probably contributes to the failure of funds to achieve significant abnormal returns to compensate expenses. The results also indicate short-run performance persistence over one-to four-quarter holding periods after a specific quarter (maximum total holding period equal to 15 months).