ETFs versus Active Management in Emerging Debt. Who is the Winner?

The objective of this thesis is to see if active investment funds are able to outperform ETFs on emerging market debt. After a broad review of the literature, we analyze the monthly returns of 186 actively managed funds and 228 ETFs that focus on emerging market bonds between 2010 and 2020. Our results show that both ETFs and active funds underperform their corresponding benchmark, likely due to the high transaction cost of this asset class. On average, we observe that active funds are not able to beat their ETF counterparts, as they have lower abnormal returns and Sharpe ratio over our study period. However, the higher risk-adjusted return and lower minimum monthly return during Covid-19’s sell-off support the idea of the active manager’s ability to better limit the risk associated with the asset class, especially in volatile periods. We also find that active U.S. funds focusing on emerging market hard currency corporate bonds have managed to consistently outperform their passive counterparts. Finally, our results show that European ETFs have a lower tracking performance than US-based ETFs, as their market price is affected by the EUR/USD exchange rate and the decentralized structures of European financial markets.