Measuring the relative performance of ETFs

Abstract

This paper measures the relative performance of ETFs in the US market. The historical data on four ETFs and four Mutual Funds are collected through 2011 to 2013. To examine the relative performance of ETFs compared to the Mutual Funds, this paper employs the methodology of Jensen’s Alpha and Tracking Error. According to the regression, Jensen’s Alphas of the ETFs and Mutual Funds are very close, while the Tracking Error of the ETFs is larger than that of the Mutual Funds. The results of the empirical study show that ETFs do not outperform the Mutual Funds. However, ETFs have several advantages over the Mutual Funds, such as on the aspect of management cost.