Effects of size on the exchange-traded funds performance

Kiran Paudel () and Atsuyuki Naka
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Kiran Paudel: University of New Orleans
Atsuyuki Naka: University of New Orleans

Journal of Asset Management, 2023, vol. 24, issue 6, No 3, 474-484

Abstract: Abstract This study investigates the effects of size on the risk-adjusted fund performance of US-publicly listed index-tracking passive equity exchange-traded funds (ETFs). Using panel quantile and Fama–MacBeth cross-sectional regression approaches, we determine that the asset-based size growth is informative in the risk-return trade-offs of ETFs, and that these ETFs do not follow a constant return-to-scale. The quantile regression results show that the rate of return-to-scale diminishes as the ETFs size increases and becomes negative for the most significant fund group. The size has a considerably substantial negative impact on the highest-performing clusters of ETFs, suggesting that the diseconomies of scale found in conventional active mutual funds affect the ETFs. The results align with Indro et al. (Financ Anal J 55: 74–87, 1999) findings of mutual funds that there are diminishing marginal returns to information acquisition and trading, and the marginal returns become negative when the fund exceeds its optimal size. This study provides further insights and understanding of the performance and size relationship of index-tracking passive equity ETFs.

Keywords: Exchange-traded funds; Panel quantile regression; Index-tracking funds; Asset size; Scale economies; Risk-adjusted alpha (search for similar items in EconPapers)
JEL-codes: G1 G10 G11 G12 G14 G19 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41260-023-00321-4

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