The Performance and Trading Characteristics of European Exchange-Traded Funds

Exchange-Traded Funds were brought to life early in the 20th century but made popular some decades after with the emergence of an alternative finance, mainly composed of out-of- common instruments, and economically-sensitive to today’s world. As of today, exchange- traded funds are fully part of a portfolio. Those instruments are becoming more and more popular and have experienced a significant increase in consideration over the last few years. Within the frame of this thesis, we focus only on trackers. In brief, trackers replicate an index (composition-wise) and distributed as shares traded on the market. As it remains a financial instrument in its essence, it is worth thinking of the way it works, its in-depth understanding, return and behavior. This paper dives deeper into the performances of three specific ETFs that we chose to be European. Most of the academic papers either give a particular analysis or a global analysis on US-exchange quoted stocks or international ETFs. Quoted on four different markets, those three indices follow three important indices of the European market: The FTSE 100, the MSCI Europe Index and the Eastern Europe Capped Index. In order to analyze their overall performance, we will have to use the tracking error as a main concept. The four ETFs we chose are identical but quoted on four stock exchanges: London, Frankfurt, Milan and Amsterdam. This allows us to determine the exchange where each ETF is the most efficient and which ETF is the best performer in each place. To analyze this issue more deeply, we also look at trading characteristics such as volume of transaction that might play a crucial role in explaining the observed results. We also give an insight on tax, regulation and investor’s preferences which are criterions playing a significant role in assessing why an asset is more popular or convenient at some place. This analysis is more qualitative, by opposition to the tracking error calculation. It is therefore sensu stricto limited to the literature review related to the abovementioned perspectives and is reserved to a post-result analysis within the empirical part. We conclude each study by providing a full, albeit short, assessment on arbitrage possibilities.