Evaluating the performance of European ETFs relative to matching index funds: 2011-2017

Exchange-traded funds have been the great beneficiary of the shift toward passive investing that occurred during the last decade. This relatively new investment product more than doubled its listing on exchanges within a decade and has gained the favours of institutional and retail investors alike with a promise of broad-market access, transparency and cost efficiency. Yet, despite their popularity and rapid adoption by investors, ETFs have not completely overshadowed conventional index funds. While numerous studies have been conducted on the performance and the determinant of performance of the two index products in the US where passive investing and the ETF industry are well developed, additional investigations are still to come for the second ETF market: Europe. In this master thesis, we focus on the European ETF market and investigate the ability of European-listed ETFs and their matching index mutual funds at closely tracking their underlying equity index using tracking error measure. Results suggest that both type of funds recorded levels of tracking error over the observed 2011-2017 period. ETFs replicating MSCI Emerging market and MSCI World displayed higher tracking error than ETFs tracking developed markets indices. European-listed ETFs failed to track the S&P500 as closely as the main US ETFs. Lastly, there was no statistically significant difference in the mean value of tracking error of ETFs and matching index funds in our sample.