Unskilled fund managers: Replicating active fund performance with few ETFs

Fernando Moraes, Elias Cavalcante-Filho and Rodrigo De-Losso

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: This paper uses Exchange Traded Funds (ETFs) instead of risk factors as benchmarks to examine active mutual fund performance distribution. While transaction costs are included in the ETF returns, that is not true regarding risk factors, making it more challenging to characterize extraordinary performances via alphas. Assessments are based on the estimation of the skilled funds proportion defined by Barras et al. (2010). After evaluating several ETF combinations, we conclude that sets of 3 to 5 ETFs replicate most levels of active fund performance. Finally, we propose specific ETF selection algorithms, whereby we estimate that 95% of active management funds fail to generate value for their investors. Alphas calculated with ETFs are higher than those using risk factors, and the difference is similar to the transaction costs required for investing in risk factor portfolios (Frazzini et al. (2012)).

Keywords: Mutual funds; Performance measures; ETF; Risk factors (search for similar items in EconPapers)
JEL-codes: G11 G2 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Working Paper: Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s105752192100226x

DOI: 10.1016/j.irfa.2021.101900

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