CHAPTER-2 REVIEW OF LITERATURE

Transcription

1 CHAPTER-2 REVIEW OF LITERATURE Exchange Traded Funds have a brief history. ETFs have not faced extended researching interest. The literature presents very few records of studies related to this issue, particularly in empirical level. The most significant papers are introduced in this chapter. The literature can be subdivided into the following categories, Studies related to ETFs in general, covering description of ETFs, demonstrating the tax and other certain advantages of ETFs in comparison to traditional mutual funds. Studies providing an introduction to ETFs, focusing on their origin, describing their main types and the exchanges where they are (or were) traded, analyzing their characteristics and operating mechanism. They also indicate the benefits the participants of capital markets gain by ETFs existence. Some papers compare ETFs and index funds, demonstrating that the main differences among them are related to management expenses, transaction fees and tax efficiency. They also suggest that the tracking error s comparison between ETFs and index funds is difficult because of the lack of a true benchmark for comparison. Some authors study performance and the trading characteristics, performance is studies by applying Sharpe ratio, Treynor ratio and Jensen alpha and trading characteristics are studied by investigating the ability of ETFs to accurately replicate the performance of their underlying indexes, for finding the existence of tracking error, In

2 parallel, they study whether the ETFs are trading at their NAVs, to find whether they trade at a premium from their net asset value or discount to their NAVs. Few authors try to compare the performance of ETFs with that of broad market index, to prove that a portfolio of passive ETFs can provide above market returns with the least risk assumed. They also study the performance persistence of ETFs over the market index. Few other compare the performance of Active (vs) Passive ETFs by applying the Jensen s Alpha as a performance measure. The literature is discussed below, M. JAYADEV (1996) 1 In this paper an attempt is made to evaluate the performance of two growth oriented mutual funds (Mastergain and Magnum Express) on the basis of monthly returns compared to benchmark returns. For this purpose, risk adjusted performance measures suggested by Jenson, Treynor and Sharpe are employed. It is found that, Mastergain has performed better according to Jenson and Treynor measures and on the basis of Sharpe ratio it s performance is not upto the benchmark. The performance of Magnum Express is poor on the basis of all these three measures. However, Magnum Express is well diversified and has reduced it s unique risk where as Mastergain did not. These two funds are found to be poor in earning better returns either adopting marketing or in selecting under priced securities. It can be concluded that, the two growth oriented funds have not performed better in terms of total risk and the funds are not offering advantages of diversification and professsionalism to the investors. Ackert and Tian (2000) 2 show that discounts on the price of SPDRs had no economic significance between 1993 and They find that, in

3 contrast to closed-end mutual funds, the difference between SPDRs and their net asset value is economically insignificant. The difference is somewhat larger for MidCap SPDRs, but still substantially less than the typical closed-end fund. They conclude that the mechanisms to create and destroy shares act to limit deviations from net asset value. Based on institutional ownership data, they conclude that individuals rather than institutions invest in SPDRs. They also find that the returns of SPDRs are not excessively volatile relative to the underlying index. Dellva (2001) 3 applies a cost comparison among the primary trackers of S&P 500 Index, comparing funds of ETFs and index mutual funds investing classes. He exhibits a significant benefit of ETFs with reference to annual expenses, even though they shoulder transaction costs and commissions that concern brokerage firms. This advantage becomes greater if an investor does not liquid his shares for a long time period. Bernstein (2001) 4 offers a primer on ETFs. Beyond the definition and description of ETFs, he demonstrates the tax and other certain advantages of ETFs in comparison to traditional mutual funds. Gastineau (2001) 5 provides an introduction of ETFs, focusing on their origin, describing their main types and the exchanges where they are (or were) traded,analyzing their characteristics and operating mechanism. He also indicates the benefits the participants of capital markets gain by ETFs existence. Frino and Gallagher ( empirically study index fund tracking error. They explain that the primary factor that causes index fund tracking error is the cost of transactions which includes liquidity concerns, fund cash flows, dividends, volatility of the benchmark, corporate activity,

4 and index composition changes. They find that the tracking error associated with the S&P 500 index funds follows a quarterly (seasonal) pattern. The tracking error is lowest at the end of each calendar quarter. They surmise that this seasonal effect may be the result of the timing of dividend payments by the funds. Other reasons for tracking error, they conclude, may have to do with the changes in the index itself. Jonne M. Hill and Barbara Mueller (2001) 7 made a research on ETFs and they concluded that Tracking errors and returns based on fund NAV relative to the index reflect characteristics of the product structure. In addition, price-to-index returns and tracking error reflect ETF prices that are captured at a different time from the underlying index and the short-supply and demand factors relevant to the ETF, as well as the hedging instruments used by the market makers. NAV tracking error is much lower than price-to-index tracking error and is the most useful measure in assessing the long-term characteristics of an ETF relative to its underlying index. Elton, Gruber, Comer and Li (2002) 8 they examine the characteristics and the performance of SPDRs. Firstly they examine the return on Spiders and Since a Spider has its basic value determined by the S&P Index, they compare the return on Spiders to the return on the S&P Index and then try to decompose any differences in return to see what accounts for them.they break Spider return into two components: the return due to changes in NAV and the return due to deviations of NAV from price. Secondly they study the Spider price deviate from NAV. Lastly they compare Spiders to other instruments whose performance is also directly related to the S&P Index. In addition to the possibility of holding the shares that comprise the S&P Index directly or holding Spiders, investors can approximate the return on an index by holding an index fund or by holding short-term debt instruments and an index future. They find that the net asset value of SPDRs moves closely to its market price, as a result of the in kind creation and redemption s

5 mechanism. Further,they show that SPDRs underperforms the S&P 500 Index and its low costs index funds counterparts. They attribute this underperformance to the lost income caused by the policy of not reinvesting the dividends received on the underlying assets and holding them in cash. Poterba and Shoven (2002) 9 compare the pre-tax and after-tax returns of SPDRs and Vanguard index fund; both track S&P 500 Index, finding that they substantially present the same records of performance. They combine these findings with the tax efficiency of ETFs and they conclude that ETFs offer investors a less taxable method to invest in a broad market index and to achieve returns analogous to their index funds counterparts. Engle and Sarkar (2002) 10 examine the magnitude and persistence of discounts both daily and intradaily.on average, they find that ETFs are efficiently priced since only small deviations were seen,lasting for only a few minutes. Both domestic and international ETFs are examined, each from an end-of-day perspective and from a minute-by-minute intradaily framework. The overall finding is that the premiums/discounts for the domestic ETFs are generally small and highly transient, once mismatches in timing are accounted for. Large premiums typically last only several minutes. The standard deviation of the premiums/discount is 15 basis points on average across all ETFs, which is substantially smaller than the bid-ask spread. For international ETFs, the findings are not so dramatic. Premiums and discounts are much larger and more persistent, frequently lasting several days. The spreads are also much wider and are comparable to the standard deviation of the premiums. Scott Rasmussen(2002) 11 The purpose of this study was to quantify the comparative costs and benefits of buying long with ETFs and index mutual funds; specifically, the differential effects upon returns of

6 expenses, dividend treatment active management, capital gains distributions, and transaction costs. It is found that although ETFs are hailed as cost- and tax-efficient alternatives to index mutual funds, their relative performance for a given index depends heavily on the costs and tax consequences of the individual funds. SPY has attracted a lot of attention to itself and to ETFs in general because its low expenses, capital gains distributions, and bid-ask spread make it an attractive alternative to S&P 500-based mutual funds, but the same is not true for all ETFs. Other ETFs tend to have expense ratios closer to, or even higher than, their mutual fund competitors, in addition to making larger capital gains distributions and having wider bid-ask spreads. In general, ETFs become more cost-effective relative to mutual funds as the size and the timehorizon of investments increase. Philippe Jorion (2003) 12 in his article explored the risk and return relationship of active portfolios subject to a constraint on tracking-error volatility (TEV), which can also be interpreted in terms of value at risk. Such a constrained portfolio is the typical setup for active managers who are given the task of beating a benchmark. The problem with this setup is that the portfolio manager pays no attention to total portfolio risk, which results in seriously inefficient portfolios unless some additional constraints are imposed. The study reflected that TEVconstrained portfolios are described by an ellipse on the traditional mean variance plane. This finding yields a number of new insights. Because of the flat shape of this ellipse, adding a constraint on total portfolio volatility can substantially improve the performance of the active portfolio. In general, plan sponsors should concentrate on controlling total portfolio risk. Kostovetsky (2003) 13 compares ETFs and index funds, demonstrating that the main differences among them are related to management

7 expenses, transaction fees and tax efficiency. He also suggests that the tracking error s comparison between ETFs and index funds is difficult because of the lack of a true benchmark for comparison. Gerasimos G. Rompotis (2003) 14 In this paper the author compares ETFs and Index Funds Performance during the time period from 4/3/2001 to 11/20/2002, using a set of 16 ETFs and index funds that in pairs track the same indexes. He estimates their average return and mean risk level, finding that they substantially produce quite similar results. He regresses ETFs and index funds return on return of the underlying indexes and finds out that they don t achieve any excess return than this of their benchmarks. He computes ETFs and index funds average tracking error, confirming their analogous tracking ability. Finally, he presents ETFs and index funds major sources of costs and, regressing average return on expense ratio, he exhibits a significant positive relation of our ETFs with their expense ratio. This relation is very shortly verified in index funds Gastineau (2004) 15 looks at why ETFs underperform index funds that track the same index. His focus is on the operational efficiency of the funds management. By inspecting the historical returns (through 2002) of ishares, Spiders, and Vanguard indexes following the S&P 500 and the Russell 2000, he notes that the ETFs typically underperform their respective index funds.he says that a significant portion of the underperformance is likely due to the failure of ETF fund managers to reduce their transactions costs in a way that is common among index fund managers. When indexes change their composition and/or weighting, the index fund manager will time his modifications to the fund in order to minimize transactions costs. He also notes that although there are no legal barriers against this timing in ETFs, ETF managers have not yet adopted this method of cost reduction.

8 Gallagher and Segara (2004) 16. This study examines the performance and trading characteristics of exchange-traded funds (ETFs) in Australia. They investigate the ability of index oriented (classical) ETFs to track underlying equity benchmarks on the Australian Stock Exchange, and provide a comparison of the tracking error volatility between these types of market-traded instruments and equity index funds operated off-market. The authors find that classical ETFs closely track their respective indices, but they note that ETFs in Australia have not faced the same degree of acceptance in comparison to the reception of ETFs in other markets. Andy Lin and Fan-Ju (2004) 17 In addition to the characteristics and performance of TTT (Taiwan s first ETF), this research examined whether ETF is a better choice for Taiwan s investors by applying Markowitz s portfolio theory, Sharpe ratio, Treynor measure and Jensen index. In the mean-variance analysis, the empirical result shows that TTT has a smaller standard deviation as compared to its fifty underlying stocks, which makes TTT an attractive investment tool for Taiwan s conservative investors. However, further examination shows that the performance of TTT is relatively unsatisfactory in comparison with the market benchmark portfolio and a hypothetical portfolio.evidently, TTT, based on the market capitalization in determining the allocation weights, does not yield the most appealing portfolio while the hypothetical portfolio, which applies the Markowitz s theoretical framework, is showing more attraction during the sample period. Jares and Lavin (2004) 18 study this issue for Japan and Honk-Kong WEBs that trade on the AMEX. Non-tradability of the underlying stocks is an especially meaningful concern in this case since Asian markets are closed for the day before U.S. markets open. For these ETFs, an

9 Indicated Optimized Portfolio Value serves as the Indicative NAV and is disclosed throughout the day. It is based on stale stock prices and accounts solely for changes in exchange rates. Jares and Lavin find frequent discounts and premiums for the period ranging from 1996 to Moreover, there is predictability in returns giving rise to highly profitable trading rules. Simon and Sternberg (2004) 19 This paper examines the forecasting power of German, UK and French ishares for the next day returns of the underlying Morgan Stanley country equity indexes and assesses whether European ishares overreact to developments after the close of European trading. The findings indicate that although deviations of European ishare prices from net asset values (NAVs) at the close of US trading have significant forecast power for next day NAV returns, they overpredict. Deviations of closing ishare prices from their NAVs also lead to next day ishare price reversals that average roughly 3/8 of the size of the deviations. Finally, the paper demonstrates the profitability of trading rules that exploit the tendency of European ishares to overreact to late day US trading activity. also find significant premiums and discounts at the end of the day and overreaction for European ETFs traded on the AMEX. Hence, if the trading system appears to enhance pricing efficiency for traded funds, some inefficiency seems to remain for ETFs replicating illiquid or foreign benchmarks. Andy Lin and Anthony Chou(2006) 20 this research investigates: (1) the characteristics and formation of tracking errors of the TTT, (2) the underlying factors which influence the premium/discount of the TTT, and (3) the pricing factors of the TTT s return and trading volume. Interesting conclusions are reached. First, the tracking error of the TTT iscmainly constituted by its cash dividends, whose impact became so obvious in the peak dividend payout season. Second, the management expenses are identified as the main factor causing the gap between two

10 different tracking error series. Third, the effect on TTT tracking errors of stock replacement operations is documented. It is evident that there are three apparent shocks, signaling potential arbitrage opportunities. Nevertheless, this arbitrage potential is deemed limited and the duration is short. Finally, the multivariate model shows that the TTT discount/premium could be attributed to its own volatility and market return. And the return of the TTT is highly correlated with the general stock market movements and its arbitrary opportunity. However, the trading volume of the TTT is merely affected by its own price volatility. Nikolaos T. Milonas* and Gerasimos G. Rompotis** (2006) 21 In this paper they study the performance and the trading characteristics of a sample of 36 Swiss Exchange Traded Funds during the period Using daily data they find that Swiss ETFs underperform their underlying indexes and encumber investors with greater risk. They also find that Swiss ETFs do not adopt full replication strategies and the magnitude of tracking error is substantial to an approximate average of 1.02%. Further investigation reveals that the tracking error is positively related to the management fees and risk of ETFs while the impact of expenses on ETFs performance is negative on ETF investor returns. Finally, in regression results they estimate that the volume of Swiss ETFs is positively affected by the intraday price volatility, the number of trades, and the trading frequency while a significant part of volume is unrelated to the above factors. Manuel Ammann, Stephan Kessler and Jurg Tobler(2006) 22 stated that for investors, it is important to know what trading strategies an asset manager pursues to generate excess returns. In this paper, they proposed an alternative approach for analyzing trading strategies used in active investing. They used tracking error variance (TEV) as a measure of activity and introduced two decompositions of TEV for identifying different investment strategies. To demonstrate how a tracking error

11 variance decomposition can add information, a simulation study testing the performance of different methods for strategy analysis is conducted. In particular, when investment strategies contain random components, TEV decomposition is found to deliver important additional information that traditional return decomposition methods are unable to uncover. Gerasimos G. Rompotis(2006) 23 This paper constitutes a presentation of empirical research on Exchange Traded Funds. Using daily data for a sample of 30 American ETFs during the period between 4/3/2001 and 8/7/2002, the study first investigates the price relation among ETFs and underlying indices, finding that these values are not equal. Further, it is discovered that ETFs are mainly traded in premium in regard to their Net Asset Values. Afterwards, he calculates the sample s percentage return, which, on average, is negative but stands closely to zero, and standard deviation, which is low enough, indicating the great degree of ETFs portfolio s diversification. Applying single regression estimations, it is found out that the falling of capital markets after the abnormal growth until latest s 2000 affects ETFs to behave conservatively. Finally, he uses three methods to measure the gap among ETFs and underlying indices return, the well known tracking error, finding that this difference is not much greater than zero, implying that ETFs performance moves closely to the tracking indices. Tzu-Wei KUO and Cesario MATEUS (2007) 24 The aim of this paper was to investigate the performance and persistence of 20 ishares MSCI country-specific exchange-traded funds (ETFs) in comparison with S&P 500 index over the period July 2001 to June 2006.In this analysis the Sharpe, Treynor and Sortino ratios were used as risk-adjusted performance measures. To evaluate performance persistence i.e., if there is any relationship among past performance and future performance, they applied the Spearman Rank Correlation Coefficient

12 and the Winner-loser Contingency Table.The conclusions can be summarized as follows. First, ETFs can beat the U.S.market index based on risk-adjusted performance measures. Second, past performance of ishares MSCI country-specific ETFs can predict future performance, based on annual return. Gerasimos G. Rompotis(2007) 25 This paper consists of a comprehensive empirical research on ishares exchange traded funds performance and trading characteristics. At first, he investigates the ability of ishares to accurately replicate the performance of their underlying indexes, finding that there is a significant tracking error among ishares and indexes returns, especially for ishares that track the international capital indexes of Morgan Stanley. In parallel, he exhibits that ishares mainly trade at a premium from their net asset value. Further, he demonstrates that tracking error is strongly affected by ishares expense ratio and risk and we provide evidence that tracking error is also induced by the premium and the trading volume of ishares. Besides, he finds that premium is affected positively by tracking error, while volume, which reflects the liquidity of ishares, is oppositely related to premium. It is also demonstrated that the lagged premium has sufficient predictive power on return, since performance is estimated to be negatively related to the lagged premium. Finally, the study provides very limited evidence that the volume is negatively related to the lagged premium and lagged return. In contrast volume is influenced strongly positively by the intraday price volatility of ishares. Mustafa Mesut Kayali (2007) 26 This study investigates the pricing efficiency of the Dow Jones Istanbul 20 (DJIST),the first exchange traded fund in Turkey trading on the Istanbul Stock Exchange and following the performance of the Dow Jones Turkey Titans 20 Index since January 14, In particular, he examines the deviations of

13 price from net asset value (NAV), or premiums and discounts, over the first year of DJIST s trading. It is found that there is a close pricing relationship between the two price series and document smaller deviations of price from NAV. That is, the DJIST trades at a smaller discount on average. Although this discount is statistically significant, it does not seem to be significant economically. Also, the premiums and discounts do not persist over time and disappear within two days. Therefore, he concludes that the market for the DJIST is efficient and deserves credit from international investors seeking exposure to an emerging stock market. Gerasimos G. Rompotis(2008) 27 The performance and the trading characteristics of 62 German Exchange Traded Funds during the period 11/04/ /09/2006 are investigated in this paper. Using weekly data we find that, on average, German ETFs slightly underperform their benchmarks and encumber investors with greater risk than indexes. Also found that a number of 26 ETFs of the sample do not follow full replication strategies resulting in a substantial mean tracking error of 1.07%. By regression analysis, it is revealed that the tracking error is positively affected by risk, bid-ask spread and management fees.additional research shows that the expense ratio relates positively to volatility, absolute premium and bid-ask spread, and relates negatively to assets. The negative relationship among expenses and assets reveals the achievement of economies of scale when the size of ETFs increases. In addition, the tracking error, expense ratio and absolute premium are found to positively affect the bid -ask spread. Finally, in regression results we find that the weekly risk of ETFs positively influences their trading volume while a significant portion of volume is unexplained.

14 Benchmark Funds Asset Management Company(2008) 28 research department did research in early 2008 on the topic of Myth of Eternal Alpha It has often been argued that individual active fund managers are consistently able to exploit anomalies and aberrations that may exist in the market and while considering out performance/ under performance one should look at longer periods. Svetina and Wahal (2008) 29 study a sample of 584 domestic equity, international equity, and fixed income Exchange Traded Funds from their inception to the end of The basic objective of their study is to analyze the performance of ETFs and the nature of competition created by them for index mutual funds and for the incumbent ETFs. The findings show that on average, ETFs underperforms their benchmark indices and are not immune from tracking error. A comparison of ETFs and index funds reveal that almost 83 percent of all ETFs track indices for which there are no corresponding index mutual funds. These ETFs generally track esoteric non-mainstream indices, effectively expanding the passive investment opportunity set for investors. ETFs that compete directly with index mutual funds deliver slightly better performance when compared to retail index funds and equivalent to the performance of institutional index funds. Thus, while providing at least comparable performance, ETFs also provide immediacy. The impact of this is that the entry of ETFs that track the same index as incumbent index funds reduces net flows to index mutual funds. Moreover, they find that the introduction of competing ETFs permanently reduces the demand for incumbent ETFs in the same asset class and investment style category. J.Gayathri and P.Bhuvaneswari (2009) 30 This paper examines the performance of ETFs listed on NSE from 2005 to year by comparing the returns and risk of the ETFs with the return and risk of the index. Sharpe

15 ratio and Treynor ratio were used. The result showed that NIFTY BeES was the best performer. Gerasimos G. Rompotis (2009) 31 This paper expands the debate about active vs. passive management using data from active and passive ETFs listed in the U.S. market. The results reveal that the active ETFs underperform both the corresponding passive ETFs and the market indexes. With respect to risk-adjusted returns, both active and passive ETFs provide investors with no positive excess returns, an expectable finding for the passive ETFs but not for the active ETFs which are aimed at beating the market. Going further, the underperformance of active (2009)ETFs is depicted to the low performance rates such as the Sharpe or the Treynor ratios they receive relative to the passive ETFs and the indexes. Furthermore, regression analysis on the selectivity and market timing skills of ETF managers indicate that the managers of both the active and passive ETFs are lacking in such skills. However, the passive managers are not expected to have such skills. Finally, tracking error estimates indicate that the discrepancy between ETF and index returns is greater for active ETFs However, this result is to be expected as the active ETFs do not target to replicate the performance of the indexes. Stijn Zweegers (2010) 32 The extended Sharpe ratios of the ETFs are directly tested to the extended Sharpe ratios of the mutual funds. Both investment strategies did not outperform the benchmark according to the extended Sharpe ratio, since the average ratios both are negative. The actively managed mutual funds did however outperform the passively managed ETFs according to a T-test with a significance level of five percent. Meaning that according to the extended Sharpe ratio, investing in mutual funds would have been better over the evaluation period than investing in ETFs. Given that the mutual funds give a better return relative to their risk. Mutual funds did not significantly outperform the benchmark according to the Jensen s alpha since they have a negative average alpha tested at a significance level of five percent or less. The

16 overall managers goal is not accomplished. However, the mutual fund managers did significantly outperform the alternative investing strategy, ETFs. The T-test shows a significant outperforming with a significance level of five percent.the overall conclusion of this papers research is that the active mutual funds managers outperformed the passive ETFs managers. P. Natarajan and M. Dharani(2010) 33 Nifty BeES is the first Exchange Traded Funds in the Indian Capital Market and its daily returns are compared to benchmark returns. The Researcher found out that Nifty BeES basically overperforrmed their benchmark while they endorsed their investors with lesser risk than the standard deviation of the Nifty Index. Further, this paper analyses the relationship between portfolio returns and market returns by using Simple Regression Model. The Researcher discovered that returns of the Nifty BeES for price was not related to the index returns, but returns of the Nifty BeES for NAV was related to the index returns. This was due to the price of the Nifty BeES in the secondary market being based on supply and demand while NAV of the Nifty BeES was based on the underlying index. Finally, this paper examined the observed deviation between returns of the Nifty BeES and Nifty Index.Applying three methods, the Researcher concluded that the average tracking error fluctuates from approximately 0.59% to 0.907% for price and 0.049% to 0.549% for NAV. All the methods, which were used in this study for calculating tracking error, did not produce the same results. During the study period of 6 years, portfolio returns of the Nifty BeES beat the market returns and hence it can be considered as one of the investment products in the promising Indian capital market Prashanta Athma and Raj Kumar(2011) 34 The study covers the trends and progress of ETFs and Index Funds in India and to evaluate the performance of ETFs vis-à-vis Index Funds in India. The study is based on secondary data and covering the period of five years from 2005 to

17 2009 for the purpose of evaluating performance of select ETFs and Index Funds in India. Since inception, the data has been collected for the purpose of analyzing trends and progress of ETFs and Index funds in India. The parameters for evaluating the performance are Net Asset Value, Risk, Return, Expenses Ratio, Tracking Error, Reward to Variability and Differential Return. The statistical tools like Standard Deviation, Beta, Alpha, R-squared and Sharpe Ratio are used for data analysis. It is concluded that ETFs have given better opportunity for the small investors in terms of diversified portfolio with a small amount of money; low expense ratio, reduced tracking error, lower risk and volatility as compared to Index Funds. The ETFs can become a best investment alternative, provided, awareness is created among the investors. Pedro Kono, Pan Yatrakis., Sabrina Segal (2011) 35 This study tests the market efficiency of the Japanese equity market. The analyses compare the performance of a portfolio consisting of exchange-traded funds (ETFs) with that of the overall market, exemplified by the Topix Index, during the period of June 30, 2008 to June 30, The ETF portfolio is constructed according to the Modern Portfolio Theory (MPT) developed by Harry Markowitz in The study concludes that an optimal ETF portfolio can outperform an overall market index when performance is measured using the Sharpe ratio, i.e., the return per unit of risk. Gerasimos G. Rompotis (2011) 36 The paper assesses whether exchange-traded funds (ETFs) can beat the market, as it is expressed by the Standard and Poor (S&P) 500 Index, examine the outperformance persistence, calculates tracking error, assesses the tracking error persistence, investigates the factors that induce tracking error and assess whether there are predictable patterns in ETFs performance.. The author uses a sample of 50 ishares during the period and calculates the simple raw return, the Sharpe ratio and the

18 Sortino ratio, regresses the performance differences between ETFs and market index, calculates tracking error as the standard deviation in return differences between ETFs and benchmarks, assesses tracking error s persistence in the same fashion used to assess the ETFs outperformance persistence, examines the impact of expenses, risk and age on tracking error and applies dummy regression analysis to study whether the performance of ETFs is predictable. The results reveal that the majority of the selected ishares beat the S&P 500 Index, both at the annual and the aggregate levels while the return superiority of ETFs strongly persists at the short-term level. The tracking error of ETFs also persists at the short-term level. The regression analysis on tracking error reveals that the expenses charged by ETFs along with the age and risk of ETFs are some of the factors that can explain the persistence in tracking error. Finally, the dummy regression analysis indicates that the performance of ETFs can be somehow predictable. Alok Goyal and Amit Joshi (2011) 37. This paper studies the financial performance, variations and also analyses the risk behaviour of the selected Gold ETFs in comparison of NSE. The data for this has been taken from the NSE website. The period taken for the study is March 2008 to November Analysis is made by using financial tools like Sharpe s index, Treynor s ratio by calculating alpha, beta and standard deviation of the selected funds. DR.PRASHANTA ATHMA and Ms SUCHITRA K (2011) 38 This paper stresses upon the inclusion of Gold ETF in a portfolio for risk diversification; to assist the investor in the selection of best Gold ETF option and to analyze the tax implications of Gold ETF. Simple statistical tools like Averages, Standard Deviation and Coefficient of Variation are used. For the construction of portfolios, three most actively traded securities namely Reliance Industries Ltd, ICICI Bank Ltd and State Bank of India (SBI) are taken as one portfolio and the other portfolio includes Gold ETF and

19 top two actively traded securities in order to reflect upon the effect of inclusion of Gold ETF in a portfolio. DR. PREETI SINGH (2011) 39 In this paper ETFs are compared with Mutual Funds. It had been found from all the above discussion that ETFs are more reliable than mutual funds. If the present situation of the world is analyzed most of the trading is taking place on barter system. Individuals having one particular good wait for the proper time by analyzing the market trend and then sale it in exchange of the money or other goods. Majority of the world s population do not hold precious assets what they can invest into the business. Rather majority belongs to subclass or poor community which has to earn money rapidly to meet their basic needs. Keeping all these aspects in mind Exchange is the better option rather than availing the mutual funds which are more expensive and more time consuming. While considering the managers of mutual funds investments, there are more chances that managers may exploit the interests of investors by not letting them know properly about their current status. Also in case of mutual funds there always are conflicts of interests, the reason behind could be it is very hard to manage a big investment than managing the small investments as is in the case of exchange trade funds. There are few things necessary to observe before on enter into the exchange trade. Exchange trade is the derivative of index fund that totally operate on the basis of previous market values and trends. Before investing it should be clear in one s mind that he knows all the steeps and slops of market values or if some trading agent got to be involved he should have tremendous grip on the market flow and twists.by considering all the above mentioned facts it is found that exchange trade is the most appropriate trade as it bears less expenses have more risks but less loses. Also it is friendly to the traders having less capital in hand. Exchange trade follows the market trends the money of investors can be liquefied according to desires whenever there is need to buy or sell the stock. Hence the easiest and convenient way of making money through trade is the exchange trade fund and is gaining the popularity due to its flexible mode of operation.

20 Reena Aggarwal (2012) 40 Exchange traded funds (ETFs) are one of the most innovative financial products introduced on exchanges. As reflected by the size of the market they have become popular among both retail and institutional investors. The original ETFs were simple and easy to understand, however some recent products such as leveraged, inverse, and synthetic ETFs, are complex and have additional dimensions of risk. The additional risks, complexity, and reduced transparency have resulted in heightened attention by regulators. Concerns related to systemic risk and excess volatility, suitability for retail investors, lack of transparency and liquidity, securities lending and counterparty exposure, among others have been raised. These concerns are being addressed by a shift towards multiple counterparties, overcollateralization, and disclosure of collateral holdings and index holdings. The appropriate regulatory and market reforms can ensure the continued success of ETFs. John P. Plamondon & DePaul(2012) 41 This paper compares returns of ETFs holding physical commodities and ETFs holding derivative products to their respective spot commodity returns to identify significant performance differences based on the ETF assets. They regress ETF returns on spot commodity returns to estimate beta and R2 values. They use these Beta and R2 values to evaluate the relationship between the ETFs and their spot prices. They found that the physical ETFs perform more consistently with their spot commodities; these products are more likely to provide the expected risk exposure investors desire. Also this paper performs two mean comparison tests: the first compares the returns of the ETFs with their spot commodities; while the second compares the Sharpe Ratios of the ETFs with the Sharpe Ratios generated by their spot commodities. Their analyse of the Sharpe Ratios finds that futures based ETFs have considerable performance divergence from the physical commodity depending on if the futures market is in backwardation or contango. Finally this paper evaluates the performance of the stack and strip methods used by WTI Crude Oil based ETFs. They found that the use of a strip method improved the performance of the WTI Crude Oil ETF when the contango in the

21 futures market became more severe, and eroded performance as the market became flat or backwardated. Harip R. Khanapuri(2012) 42 Exchange traded funds (ETFs) have completed a decade of their presence in Indian capital markets although their popularity has grown very recently. Since the ETFs are issued on the basis of their underlying assets, their price movements are supposed to follow those of the underlying index or other assets they represent. The paper evaluates comovemet between prices of ETFs in India and those of their underlying assets using the econometric technique of Vector Autoregressions. The findings suggest that while comovements are stronger in equity based ETF, such relation does not exist in commodity based ETF markets. The findings have significant implications on investment style to be adopted by investors in ETF market. P. Krishna Prasanna (2012) 43 The concept of Exchange-Traded Funds (ETFs) is very popular in foreign countries, but in India, it is still in the initial growth phase. This research paper examines the characteristics and growth pattern of all the 82 exchange traded schemes floated and traded on Indian Stock markets, and evaluates their performance using Data Envelopment Analysis (DEA). On an average, ETFs grew at 37% annually during the period in India. These funds consistently outperformed the market index and generated higher returns. ETFs generated excess returns of 3% p.a. as against CNX NIFTY, which is the Indian equity market bench mark. Gold ETFs provided 13% excess returns as compared to the returns on the equity market and attracted large investments in the post financial crisis years. Data Envelopment Analysis ranked domestic and overseas fund of funds as efficient funds, which were floated by foreign Asset Management Companies (AMCs) and the AMCs with Joint Ventures in India. Among the foreign AMCs, Franklin Templeton was found to offer the most efficient fund. These

22 efficient funds are found to have higher Sharpe ratios, indicating that the DEA ranking is in broad consensus with the evaluation done using Sharpe ratios. However large funds were not found to be efficient funds. This infers that the fund size does not indicate superior performance Dr. Kaushal Bhatt (2012) 44 Investment is the commitment of funds by buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. An investment can be described as perfect if it satisfies all the needs of professional investors. There are large numbers of investment av-enues for savers. Some of them are marketable, liquid, while others are non-marketable. This paper addresses Exchange Traded Funds (ETFs), the index investments that are a cross between exchanges listed corporate securities and openended mutual funds. While ETFs are now competing with mutual funds, they have a very different history and operational structure. It is important for investors to know the difference between mutual funds and ETFs and few investors fully understand ETFs. This paper focuses on conceptual and theoretical aspects of ETFs in India. It covers its comparison with mutual funds Shefali Sinha and Mahua Dutta (2013) 45 Goldman Sachs Asset management (India) Private Limited is the first mutual fund house which came up with the concept of scheme of Gold exchange traded fund in As, the scheme's performance is directly related to the domestic price of gold. It's growth over a period of time is not reflected by some of the research studies. The study was undertaken to fill the research gap with emphasis on determining the potential of generating the performance returns of scheme of Goldman Sachs Gold exchange traded fund from the period The main objective of the study (a) to identify the performance of returns of Net Asset Value for the

23 period (b) to identify the performance of returns of domestic price of Gold for the period (c) to determine the trend analysis of computed Net Asset Value returns and (d) to determine the trend analysis of domestic price of gold returns. The hypothesis in this study involves growth rate of Net Asset Value returns & domestic price of gold returns. For this purpose, secondary data was collected historical net asset value prices & domestic price of gold for the period Computation of daily net asset value returns & domestic price of gold returns is taken into account for five years to identify the tracking error. The methods used for interpretation of data in the study are tracking error and trend analysis. The trend analysis shows that the net asset value returns are in close proximity with domestic price of gold returns through tracking error. Lower tracking error indicates the better performance of the scheme. Swati Garg & Dr. Y. P. Singh(2013) 46 This paper empirically compares the performance of two competitive financial instruments available to Indian investors, namely Exchange Traded Funds (ETFs) and Index Funds. A set of five ETFs and Index Funds that in pairs track the same benchmark indices has been analyzed in this study over a period ranging from June 2006 to December The analysis demonstrates better performance of ETFs in terms of their replication strategy, tracking ability as well as performance effectiveness over long-term investment horizon. However, there is an evidence of potential disadvantage of ETFs from very short-term investor s point of view. SURESHA.B(2013) 47 Price risk is the major risk faced by all investors. Although price risk specific to an underlying can be minimized through diversification, market risk cannot be diversified away. Price risk

24 depends on the volatility of the underlying held within a portfolio. In this study an attempt has been made to test the volatility of Gold ETF in India. Sample 14 listed Gold ETFs of NSE were taken to measure the volatility. The study also investigates the price risk associated due to inter correlation factors which are un diversifiable. Annualized Actual Volatility (AAV) model is used to calculate volatility and t test is computed for significance. GOLDBEES, GOLDSHARE, KOTAKGOLD, RELGOLD, SBIGETS have highest (significant at 1%) price volatility as compared to other counterparts and poses higher price risk to the investors. AXIS, HDFCMFGETF, IPGETF, QGOLDHALF, RELIGAREGO have moderate price volatility at 5% significance level. Interestingly, BSLGOLDETF, IDBIGOLD, MGOLD, CRMFGETF have least insignificant volatility and indicate the least price risk among the samples ETF. The correlation among these samples Gold ETF is positive except in case of CRMFGETF. Knowing the volatility helps in deciding possible range of values that an underlying will be in and when an investor knows how much volatility he is exposed to, he can make informed decisions on his investments. Prof. Dr. S. Kevin(2013) 48 The efficiency of trading in securities market is a matter of serious concern for investors as well as regulators. Innovations in securities market environment can adversely affect market efficiency. Index futures and index ETFs are two such innovations in the securities market. Both these instruments have the stock market index as their underlying asset. All the three instruments together constitute a group of informationally linked instruments traded simultaneously and continuously in the securities market. This paper analyses empirically the price behavior of stock market index, index futures and index ETFs in the Indian securities market. The

25 price data for one year (April 2011 to March 2012) have been used for the analysis. The objective of the analysis is to identify market inefficiencies or distortions in the trading of these instruments which are conceptually linked to each other. The daily return and volatility of daily return are the principal variables used in the study. The results indicate that the instruments exhibit generally consistent price behavior. However, some distortions due to speculative influence and operational inefficiency are also seen presumably because of the innovative nature of the instruments as far as the Indian securities market is concerned.

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