1 Abstract
As the ETF industry has grown by leaps and bounds in recent years, inves-tors and advisors are finding themselves with more options than ever before. There's a vast universe of ETF investment options available, and once all opportunities are narrowed down and aligned with particular investment ideology, investors evaluate the ETF options on number of different criteria to identify and spot the most attractive one of all.
This paper examines the advantages and disadvantages of ETFs compared to index funds when investing in the German funds market. It examines total and average return, volatility and tracking error of ETFs versus index funds tracking the DAX. Also a regression analysis is done in order to draw conclusion on the funds’ alpha, beta and coefficient determinant.
It can be concluded that the hypothesis of whether ETFs are a cost-efficient way for institutional investors to invest in the DAX stands and evidence is provided. Results indicate that ETFs achieve higher average returns and less average volatili-ty. In addition, ETFs pursue a better full replication strategy than index funds. As a result, the tracking error for ETFs is lower than the index funds’.
2 Introduction
Some studies have revealed that institutional investors put less emphasis on trading through stock exchange but prefer to directly create and redeem ex-change traded funds. An exchange-traded fund is a type of investment product that represent basket of securities such as the DAX index and are made available only through brokers and advisors.
It was in 1993, that the American Stock Exchange launched the Spiders, SPDR to track the S&P 500. It was the first exchange traded product on markets with more coming later on. Diamonds was launched in 1998 which tracked the Dow Jones in industrial average and Cubes in 1999, which tracked the NASDAQ 100
But it was the mutual funds that were the most popular with institutional and private investors both for quite some time. This trend however is only now beginning to change as institutions find that ETFs can help attain a variety of goals that many other investment vehicles simply cannot provide. A recent survey from Greenwich Associates (carried out in 2010) that polled 70 investment firms revealed that ETF use is rising sharply. Among the highlights of the study: use of ETFs among pension funds, endowments and charitable foundations has grown to about 14%. ...
Table of Contents
1 Abstract
2 Introduction
2.1 Hypothesis
2.2 Research Aim
2.3 Research Objectives
2.4 Rationale behind this Dissertation
2.5 Brief Background of Topic
2.5.1 What are Exchange Traded Funds?
2.5.2 Passive Management
2.5.3 What are Index Funds?
2.5.4 What is the DAX?
2.5.5 What are Institutional Investors?
2.5.6 What other alternatives are available for institutional investors for investment?
2.5.7 Brief Background on the German ETF Market
3 ACADEMIC LITERATURE REVIEW
3.1 Active vs. Passive Investment Strategies
3.2 Characteristics of Exchange Traded Funds (ETFs)
3.2.1 ETFs are easy to understand
3.2.2 ETFs are transparent
3.2.3 ETFs are cost-effective
3.2.4 ETFs are secure
3.3 International Investment Market (esp. Us Markets and European Markets)
3.4 Tracking Error
3.5 ETFs tracking DAX
3.6 Mutual Funds vs. ETFs
3.6.1 Tax Benefits
3.6.2 Simplicity
3.6.3 Cost-Effectiveness
3.6.4 Investing Flexibility
3.6.5 Low initial investment required
3.6.6 Trading Flexibility
3.6.7 ETFs usually have lower expense ratios
3.6.8 Transparency
3.6.9 ETFs offer options and short selling
3.6.10 Transferability
3.7 Index Funds vs. ETFs
3.7.1 Range of Indexes covered
3.7.2 Costs
3.7.3 Tax Efficiency
3.7.4 Dividends
3.7.5 Rebalancing
3.7.6 Dollar-Cost Averaging
3.7.7 Liquidity
4 TRADING AND INVESTING STRATEGIES FOR ETFs
4.1 Trading strategies for ETFs
4.1.1 Investing with ETFs
4.1.2 Gaining Industry Exposure with ETFs
4.1.3 Invest in Commodities through ETFs
4.1.4 Gain access to International Markets through ETFs
4.1.5 Bond ETFs
4.1.6 ETNs – a form of ETFs
4.1.7 ETFs and the Currency Market
4.1.8 Selling ETFs
4.1.9 ETFs to Hedge Risk
4.1.10 ETFs to Hedge Indexes
4.1.11 ETF options add to an investor’s options
4.1.12 ETFs role during Earnings Seasons
4.2 Market Index ETFs for Broad Market Exposure
4.2.1 Industry ETFs Sector Strategies
4.2.2 Country ETFs for Foreign Market Exposure
4.2.3 Foreign Currency ETFs for Interest Rate Exposure
4.3 Basic ETF Options for Playing the Earnings Season
4.3.1 Advanced ETF Options Strategies for Playing the Earnings Season
4.3.2 Commodity ETF Strategies when Commodities Impact Earnings
4.3.3 Inverse ETFs for Getting Short without Selling
4.3.4 Style ETFs
4.4 Investing Strategies with ETFs
4.4.1 Risk Management
4.4.2 International Exposure
4.4.3 Industry Exposure
4.4.4 Cash Flow Utilization
4.4.5 Price Discrepancy
4.4.6 Management Transitions
4.4.7 Market Analysis
5 EMPIRICAL ANALYSIS
5.1 Research Methodology
5.1.1 Return and risk
5.1.2 Regression analysis
5.1.3 Tracking Error
5.1.4 Empirical Data
5.2 Selection and Justification of index funds
6 RESULTS AND ANALYSIS
6.1 Return and risk
6.1.1 Regression analysis
6.1.2 Tracking error
7 CONCLUSION
Research Objectives and Core Themes
This dissertation investigates whether Exchange Traded Funds (ETFs) serve as a more cost-efficient investment instrument for institutional investors compared to traditional index funds when tracking the German DAX index. The research assesses financial performance through return metrics, volatility, and tracking error, utilizing a regression analysis to determine alpha and beta values to validate the core hypothesis.
- Comparative analysis of ETFs versus mutual/index funds.
- Evaluation of cost-efficiency and performance metrics (alpha, beta, tracking error).
- Focus on the German financial market and the DAX benchmark.
- Investigation into replication strategies (full vs. synthetic) and their impact on returns.
- Assessment of institutional trading strategies using ETFs.
Excerpt from the Book
3.2.2 ETFs are transparent
Fraud can be eliminated by having more transparency. This fact is very crucial, especially after Bernie Madoff pulled off the largest Ponzi scheme ever rev elead. Since then many investors lost faith in those investments. Mutual funds report their holdings quarterly, as do hedge funds, which mean that they are opaque most of the time. In fact, there is a lot of jostling prior to those public-reporting periods so it isn't completely certain what their holdings aremost of the time. ETFs on the other hand must report their holdings in order to be provided injunctive relief by the SEC. So investors can be certain that if they invest in an ETF they know what they are holding. They also do not have to depend on quarterly reports which show continued above market returns like Madoff issued (McMillan 2003, p. 48).
Investors can take a look everyday at the complete securities portfolio, key indicators and historical performance of an ETF (Fahrenbach, n.d.).
Not only do ETF investors get a head start on important information but because ETFs are exchange-traded, they can also react faster: ETFs are bought and sold like stocks, on an exchange. However unlike investing in stocks, with an ETF, it is as if you are investing in an entire market and diversifying your risk as though in a fund.
Summary of Chapters
1 Abstract: Summarizes the research paper's goal to compare the cost-efficiency of ETFs against index funds within the German market.
2 Introduction: Establishes the research hypothesis, identifies the DAX as the focal index, and outlines the objectives regarding the performance of ETFs versus index funds for institutional investors.
3 ACADEMIC LITERATURE REVIEW: Reviews theoretical foundations of passive vs. active strategies, defines ETF characteristics, and examines existing literature on tracking errors and performance comparison between funds.
4 TRADING AND INVESTING STRATEGIES FOR ETFs: Details practical applications of ETFs for institutional investors, including hedging, sector exposure, and the use of options during earnings seasons.
5 EMPIRICAL ANALYSIS: Outlines the research methodology, including the regression model and tracking error calculations used to analyze a sample of seven ETFs and three index funds.
6 RESULTS AND ANALYSIS: Presents the statistical findings regarding returns, volatility, and regression outcomes, concluding that ETFs generally outperform index funds in the study period.
7 CONCLUSION: Finalizes the research by confirming the hypothesis that ETFs are more cost-efficient instruments for institutional investors in the German market.
Keywords
Exchange Traded Funds, ETF, DAX, Index Funds, Institutional Investors, Tracking Error, Passive Management, Cost-Efficiency, Regression Analysis, Alpha, Beta, Volatility, German Market, Investment Strategy, Financial Performance.
Frequently Asked Questions
What is the core focus of this dissertation?
The dissertation evaluates whether ETFs provide a more cost-efficient and profitable investment vehicle for institutional investors compared to traditional index funds when tracking the DAX index in Germany.
What are the primary investment vehicles analyzed?
The study analyzes a selection of seven ETFs (such as ComStage, db x-trackers, and iShares) and three traditional open-end index funds, all benchmarked against the DAX.
What is the primary research hypothesis?
The hypothesis states that ETFs are more cost-efficient than index funds for institutional investors, specifically in the context of the German DAX, and that they will outperform index funds tracking the same index.
Which scientific methods are applied to test the hypothesis?
The author uses descriptive statistical analysis, including daily return calculations, standard deviation for risk assessment, and a linear time-series regression to determine alpha, beta, and the coefficient of determination (R2).
What is covered in the main body of the paper?
The main body covers the theoretical review of passive investment, detailed trading strategies for ETFs (hedging, sector exposure), and an empirical performance analysis based on data from 2007 to 2010.
What are the characterizing keywords of this study?
Key terms include ETFs, DAX, cost-efficiency, tracking error, passive management, institutional investment, and empirical performance analysis.
How do ETFs differ from index funds regarding tracking error?
The results indicate that ETFs generally demonstrate a lower tracking error compared to the index funds studied, suggesting they track the underlying index more efficiently.
What role does the DAX play in this study?
The DAX serves as the specific market benchmark for both the ETFs and the index funds, acting as the foundation for measuring relative performance and market exposure in the German financial sector.
- Arbeit zitieren
- Minh Vu (Autor:in), 2011, Exchange Traded Funds (ETF) - Are ETFs a cost-efficient way for institutional investors to invest in the DAX?, München, GRIN Verlag, https://www.hausarbeiten.de/document/187396
