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Analysis of the Performance of ETFs. A study on the US market

Vu, Thi Kim Lien LU and Tskhoidze, Salome LU (2021) NEKN02 20211
Department of Economics
Abstract
Exchange Traded Funds are known as a relatively recent financial innovation and have been
gaining investors' interest in recent years. The performance of ETF in comparison to other
benchmarks is still the central concern when investors make an investment decision. This thesis
conducts empirical studies in the US market, using the Mean-Variance portfolio optimization, to
construct optimal portfolios for both ETFs and underlying assets with and without short-selling
constraints to compare these two portfolios based on historical and expected performance. The
performance of individual ETFs and their underlying assets during the whole testing period and
different downturns is analyzed before portfolios are constructed. The thesis then... (More)
Exchange Traded Funds are known as a relatively recent financial innovation and have been
gaining investors' interest in recent years. The performance of ETF in comparison to other
benchmarks is still the central concern when investors make an investment decision. This thesis
conducts empirical studies in the US market, using the Mean-Variance portfolio optimization, to
construct optimal portfolios for both ETFs and underlying assets with and without short-selling
constraints to compare these two portfolios based on historical and expected performance. The
performance of individual ETFs and their underlying assets during the whole testing period and
different downturns is analyzed before portfolios are constructed. The thesis then applies Fama
and French three-factor model to assess the portfolios’ risk-adjusted returns. Finally, different
financial metrics are used to evaluate the portfolios' performance. The empirical results show that
if not taking the cost-efficiency and high liquidity characteristics of ETF into account, the ETF
portfolio often underperforms the underlying asset portfolio. Besides, with the short-selling
constraint, the ETF portfolio also underperforms the market portfolio in the testing period.
However, if those advantages of ETF are taken into consideration and if short-selling is allowed
and used as an effective hedging tool, the ETF portfolio might outperform these benchmarks. (Less)
Please use this url to cite or link to this publication:
author
Vu, Thi Kim Lien LU and Tskhoidze, Salome LU
supervisor
organization
course
NEKN02 20211
year
type
H1 - Master's Degree (One Year)
subject
keywords
ETF, portfolio optimization, Sharpe ratio, financial downturns, benchmark
language
English
id
9052718
date added to LUP
2021-10-26 08:18:41
date last changed
2021-10-26 08:18:41
@misc{9052718,
  abstract     = {{Exchange Traded Funds are known as a relatively recent financial innovation and have been
gaining investors' interest in recent years. The performance of ETF in comparison to other
benchmarks is still the central concern when investors make an investment decision. This thesis
conducts empirical studies in the US market, using the Mean-Variance portfolio optimization, to
construct optimal portfolios for both ETFs and underlying assets with and without short-selling
constraints to compare these two portfolios based on historical and expected performance. The
performance of individual ETFs and their underlying assets during the whole testing period and
different downturns is analyzed before portfolios are constructed. The thesis then applies Fama
and French three-factor model to assess the portfolios’ risk-adjusted returns. Finally, different
financial metrics are used to evaluate the portfolios' performance. The empirical results show that
if not taking the cost-efficiency and high liquidity characteristics of ETF into account, the ETF
portfolio often underperforms the underlying asset portfolio. Besides, with the short-selling
constraint, the ETF portfolio also underperforms the market portfolio in the testing period.
However, if those advantages of ETF are taken into consideration and if short-selling is allowed
and used as an effective hedging tool, the ETF portfolio might outperform these benchmarks.}},
  author       = {{Vu, Thi Kim Lien and Tskhoidze, Salome}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Analysis of the Performance of ETFs. A study on the US market}},
  year         = {{2021}},
}