The Performance and Trading Characteristics of European Index Exchange-Traded Funds

Since their inception in 1993 with the launch of the SPDR 500, exchange-traded funds became one of the most important financial products in the World. They are defined as an investment vehicle composed of shares that can be traded (bought and sold) intraday on stock exchanges at a price determined by the market. Besides, they offer several advantages to investors even if some drawbacks can be outlined. In this paper, we develop a theoretical framework as well as a literature review on exchange-traded funds. We define this financial product, we explain its creation and redemption process and we compare it to others financial products in order to begin our study. Afterward, we perform researches about the regulatory framework specific to the European market. Finally, we perform a empirical study in which we focus on the computation of the average daily returns, the volatility, the tracking errors and so on of ETFs of the European market. The aim of this thesis is to analyze ETFs’ performance and trading characteristics thanks to the computation mentioned previously. To do so, we use twelve ETFs tracking three benchmark indexes: the S&P 500, the Nasdaq-100 and the Stoxx Europe 600. In these twelve ETFs, we have three pairs of ETFs that are the same but quoted in different currencies to outline the impact of the exchange rate. Our results show that European ETFs tracking US indexes do not perfectly replicate their benchmark while European ETFs tracking European index present nearly perfect replication. This conclusion might be explained by the delay in quotation between the US benchmark and the European ETFs that track them. We also show that European synthetic ETFs have lower tracking errors than physical ones. Besides, we outline the link between the volatility and the tracking error.