Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs
Elias Cavalcante Junior () and
Rodrigo De Losso Fernando Moraes
Authors registered in the RePEc Author Service: Rodrigo De-Losso
No 2020_14, Working Papers, Department of Economics from University of São Paulo (FEA-USP)
This paper use 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 proportion of skilled funds, defined as positive-alpha funds. Such a proportion is calculated taking into account potential false discoveries and employing the method devised 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, but 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: 2020-08-18, Revised 2020-09-15
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:spa:wpaper:2020wpecon14
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers, Department of Economics from University of São Paulo (FEA-USP) Contact information at EDIRC.
Bibliographic data for series maintained by Pedro Garcia Duarte ().