Academic journal article IUP Journal of Applied Finance

The German Exchange Traded Funds

Academic journal article IUP Journal of Applied Finance

The German Exchange Traded Funds

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Exchange Traded Funds (ETFs) are investment vehicles which are aimed at replicating the performance and risk of specific broad market, sector and international equity and fixedincome indexes as well as commodities. They combine the features of mutual funds as they are baskets of shares, and ordinary stocks as they trade throughout the trading day on stock exchanges.

Given their popularity, ETFs have attracted the interest of practitioners, academics and researchers. In an earlier study, Gastineau (2001) described the main types of ETFs and analyzed their origins, characteristics and the operating mechanism. Elton, Gruber, Comer and Li (2002) studied the performance of SPDRS, which was the first ETF to be launched in the US stock market and tracked the S&P 500 index. The authors found that the performance of this ETF is inferior to the return of the underlying index as well as the corresponding index funds and future contracts. The underperformance of SPDRS is attributed to the policy of SPDRS as Unit Investments Trusts to keep the dividends it receives on the underlying stocks in non-interest generating bank accounts.

In another study on SPDRS, Poterba and Shoven (2002) examined its performance at the before-tax and after-tax level and compared it with the respective performance of the Vanguard 500 index fund, which is the largest fund investing in the equities of the S&P 500 index. The study showed that both these investment vehicles display a similar behavior, i.e., they perform similarly.

Going further, Jares and Lavin (2004) turned their attention to Japan and Hong Kong iShares which trade on the US stock market. Their investigation is concerned with the correlation between the trading prices and the net asset values of these ETFs. The researchers found substantial differences between these values and concluded that the time differences between the US market, on which these ETFs trade, and the local markets, where the equities comprising the relevant tracking indexes trade, are the main factors that can explain the premiums/discounts in the trading prices of these Asian ETFs.

Furthermore, Rompotis (2009) performed an evaluation of ETFs' performance and other trading characteristics using a sample of 73 iShares. The author found that iShares fail to accurately replicate the return of the underlying index portfolios, and he stressed that this failure is greater for international ETFs than in the case of domestic ETFs. In addition, Rompotis (2009) accentuated that iShares trade at a premium to their net asset values.

Moving the research interest from the US market to international ones, Gallagher and Segara (2005) studied the Australian ETF market and found that, before expenses, the local ETFs track their benchmarks sufficiently well. In other words, there are no significant deviations between the performance of ETFs and indexes. Moreover, the authors made a comparison between ETFs and index funds in terms of tracking error and found that the tracking error records of ETFs were lower than those of the traditional index funds.

Finally, Milonas and Rompotis (2007) focused on the European continent and examined for the first time the Swiss ETF market. The study revealed that the Swiss ETFs cannot fully replicate the return of the benchmarks, while they also load investors with greater volatility than indexes. The divergence in return and risk between ETFs and indexes can be attributed to the policy of Swiss ETFs to not adopt full replication strategies, which additionally entail significant tracking errors for Swiss ETFs.

This paper focuses on ETFs trading on the German Stock Exchange (XTRA market). Several issues surrounding the performance and other trading features of German ETFs are investigated. First, the return and risk of German ETFs are computed. The calculations show similar returns for ETFs and indexes, but ETFs are riskier than the indexes. …

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