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Costly index investing in foreign markets

Alvaro Pedraza, Fredy Pulga () and Jose Vasquez

Journal of Financial Markets, 2020, vol. 51, issue C

Abstract: We study trading behavior and performance of foreign investors by level of active management. Using a comprehensive Colombian dataset with complete transaction records, we find that aggregate underperformance of foreign investors is attributable to passively-managed foreign funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index. Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity.

Keywords: Foreign investors; Index funds; Performance; Transactional data (search for similar items in EconPapers)
JEL-codes: F36 G11 G15 G23 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.finmar.2019.100509

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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