The performance of South African exchange traded funds under changing market conditions

Damien Kunjal (), Faeezah Peerbhai () and Paul-Francois Muzindutsi ()
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Damien Kunjal: University of KwaZulu-Natal
Faeezah Peerbhai: University of KwaZulu-Natal
Paul-Francois Muzindutsi: University of KwaZulu-Natal

Journal of Asset Management, 2021, vol. 22, issue 5, No 4, 350-359

Abstract: Abstract Despite the soaring popularity of exchange-traded funds (ETFs), ETFs may find it difficult to replicate the returns of their underlying index under changing market conditions. The objective of this study is to examine the performance of South African ETFs under bullish and bearish market conditions. This paper employs a single index Markov Switching model to examine the tracking efficiency of a sample of ETFs tracking the FTSE/JSE Top 40 (J200) index from 27 November 2000 until 31 July 2019. The findings suggest that, on average, ETFs are more responsive to fluctuations in their underlying index during bullish market conditions and they display a higher tracking error during bearish market conditions. Thus, our findings support the notion that ETF performance differs across market regimes, implying that ETF fund managers should disclose their betas across different market conditions so that ETF investors and traders can adequately evaluate their risk exposures in each market condition.

Keywords: Benchmark index; Exchange-traded funds; Market regimes; Tracking error (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1057/s41260-021-00227-z

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