A cost-performance analysis of exchange traded funds: Evidence from iShares

Abstract

In this paper we perform a cost-performance investigation of ETFs in the period 2002-2006. Using Barclay's iShares as a proxy of ETFs, we find that expenses are negatively related to the size of iShares reflecting the existence of strong economies of scale. We also find that the aged iShares encumber investors with greater expenses. Further research reveals that the expenses are negatively related to performance while the impact of turnover on performance is positive. Additionally, the expenses strongly persist short-run while performance does not. Applying a return-cost based rating of iShares we find that the highly ranked iShares present the highest return but they do not necessarily present the lowest expense ratios. Additionally, the return-cost-based rating of iShares predicts positively the return of the bottom classes only in the short-run period and forecasts negatively the performance of the median and the bottom classes in the long-run period. © EuroJournals Publishing, Inc. 2009.