Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs

Elias Cavalcante Junior (), Fernando Moraes () and Rodrigo De Losso ()
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)

Abstract: 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
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Journal Article: Unskilled fund managers: Replicating active fund performance with few ETFs (2021)
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