Can You Simply Buy the Market? An Empirical Look at the Performance of European Equity Exchange Traded Funds

Christian Lumbye & Frederik Ingemann Rasmussen

Student thesis: Master thesis


The tracking performance of 202 passively managed equity ETFs listed in Europe has been examined. They portray an average tracking difference of -90 basis points and an average tracking error of 78 basis points when considering the concept of total performance shortfall. The ETFs appear to be very price efficient as this only contributed to the total performance short fall with -2 basis points, whereas the management efficiency contributed with the remaining -88 basis points. The three performance concepts have each been investigated using the Fama-MacBeth rolling regression methodology and a cross-sectional OLS regression, in an attempt to identify factors of influence. The Fama-MacBeth approach is found to be a suitable methodology when investigating the tracking ability of ETFs due to its ability of accounting for time effect and making it possible to observe coefficients over time. Through the implementation of this, we find evidence that support the claim that the total expense ratio, the element of dividend taxes and the market conditions of the benchmark index are of importance in connection to the tracking performance of ETFs. Based on this, an investor who values tracking ability is advised to assess the TER of the fund, get acquainted with the related dividend tax legislation connected to the fund domicile country and think twice before investing in emerging market ETFs.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages117