How precisely European equity ETFs mirror their flagship benchmarks? Evidence from funds replicating performance of Euro Stoxx 50 Index

Ewa Feder-Sempach () and Tomasz Miziołek ()
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Ewa Feder-Sempach: University of Lodz
Tomasz Miziołek: University of Lodz

Journal of Asset Management, 2023, vol. 24, issue 2, No 4, 135 pages

Abstract: Abstract The main goal of the article is to examine the tracking efficiency of a homogenous sample of 14 ETFs listed on European exchanges, replicating the performance of Euro Stoxx 50 Index—a benchmark index for blue chips from the euro area. This study provides some insights into the tracking quality of European ETFs over the long time horizon (2012–2021 period) including data from entire business cycle: both economic prosperity and COVID-19 crisis. The study has been made applying different tracking error calculation techniques and return intervals—daily, weekly and monthly. Passive investing may be a highly desirable, cheap and accurate method for long or short term investments in the largest 50 cap companies in the euro zone. Hence, this unique research may help to succeed in ETF selection process. The study reveals that ETFs are very effectively managed by keeping the TEs below 0.3% (for ETFs with accumulating share classes) and below 1% (for ETFs with distributing share classes). This shows that the ETFs with accumulating share classes perform much better—the average TE for three different methods is 0.11% for accumulating share classes ETFs and 0.33% for distributing share classes ETFs. It proofs, that it is not important whether to use the standard deviation of the difference between the return of an ETF and that of its benchmark index, or the standard error of regression in TE assessment, both methods give very similar results. However, TE calculation method signifies, if the average of the absolute difference between the return of an ETF and that of the index is used. Additionally, it is found that time intervals used in TE calculations matter—the shift from monthly to daily intervals results in reduction of TE levels. Using shorter intervals brings lower TE values of European ETFs.

Keywords: Exchange-traded funds (ETFs); Euro Stoxx 50 Index; Tracking efficiency; Tracking error (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41260-022-00287-9

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