The Performance of Exchange-Traded Funds

Abstract

Exchange-traded funds (ETFs) are commonly regarded as an efficient, low-cost alternative to actively managed mutual funds, yet their perceived superiority is largely anecdotal. We evaluate the performance of a comprehensive, survivorship-bias-free sample of US equity ETFs following the approach that has been commonly used to evaluate the performance of actively managed mutual funds. We find that ETFs have collectively lagged the market by an amount similar to the widely documented underperformance of active mutual funds. We perform textual and regression-based analysis to identify factor ETFs and show that most of these have also failed to beat the market. We conclude that, from a pure performance perspective, the allure of ETFs finds little support in the data.

TOPICS: Factor-based models, mutual fund performance, passive strategies, exchange-traded funds and applications

Key Findings

• ▪ ETFs have collectively lagged the market by about the same amount as active mutual funds.

• ▪ Most smart beta ETFs have also failed to beat the market.

• ▪ From a pure performance perspective, the allure of ETFs finds little support in the data.