Exchange traded funds versus active and passive unit trusts : an economic perspective

Abstract

Exchange traded funds (ETFs) are a relatively recent financial innovation receiving much attention from investors and media due to its low administrative costs. Literature related to ETF performance presents no sizeable records as a result of its brief history.This study contributes to the literature on ETF performance by comparing ETFs to their respective tracking indices as well as to comparable passive unit trusts (PUTs) and active unit trusts (AUTs) after administrative costs. Data used involved ETFs that are derived from securities listed on the Johannesburg Stock Exchange (JSE) that track FTSE/JSE indices. PUTs and AUTs were selected on the basis that they use the same FTSE/JSE indices, as the ETFs, as a benchmark.The results indicate that ETFs have a slightly lower tracking error than PUTs due to lower administrative costs. On average, ETFs and PUTs present statistically insignificant net return differences and it can be inferred that they have very similar return records. Furthermore, ETFs and AUTs, on average, also present statistically insignificant net return differences and it can be inferred that they have very similar return records.