1 Abstract
As the ETF industry has grown by leaps and bounds in recent years, inves-tors and advisors are finding themselves with more options than ever before. There's a vast universe of ETF investment options available, and once all opportunities are narrowed down and aligned with particular investment ideology, investors evaluate the ETF options on number of different criteria to identify and spot the most attractive one of all.
This paper examines the advantages and disadvantages of ETFs compared to index funds when investing in the German funds market. It examines total and average return, volatility and tracking error of ETFs versus index funds tracking the DAX. Also a regression analysis is done in order to draw conclusion on the funds’ alpha, beta and coefficient determinant.
It can be concluded that the hypothesis of whether ETFs are a cost-efficient way for institutional investors to invest in the DAX stands and evidence is provided. Results indicate that ETFs achieve higher average returns and less average volatili-ty. In addition, ETFs pursue a better full replication strategy than index funds. As a result, the tracking error for ETFs is lower than the index funds’.
2 Introduction
Some studies have revealed that institutional investors put less emphasis on trading through stock exchange but prefer to directly create and redeem ex-change traded funds. An exchange-traded fund is a type of investment product that represent basket of securities such as the DAX index and are made available only through brokers and advisors.
It was in 1993, that the American Stock Exchange launched the Spiders, SPDR to track the S&P 500. It was the first exchange traded product on markets with more coming later on. Diamonds was launched in 1998 which tracked the Dow Jones in industrial average and Cubes in 1999, which tracked the NASDAQ 100
But it was the mutual funds that were the most popular with institutional and private investors both for quite some time. This trend however is only now beginning to change as institutions find that ETFs can help attain a variety of goals that many other investment vehicles simply cannot provide. A recent survey from Greenwich Associates (carried out in 2010) that polled 70 investment firms revealed that ETF use is rising sharply. Among the highlights of the study: use of ETFs among pension funds, endowments and charitable foundations has grown to about 14%. ...
Inhaltsverzeichnis (Table of Contents)
- Abstract
- Introduction
- Hypothesis
- Research Aim
- Research Objectives
- Rationale behind this Dissertation
- Brief Background of Topic
- What are Exchange Traded Funds?
- Passive Management
- What are Index Funds?
- What is the DAX?
- What are Institutional Investors?
- What other alternatives are available for institutional investors for investment?
- Brief Background on the German ETF Market
- Academic Literature Review
- Active vs. Passive Investment Strategies
- Characteristics of Exchange Traded Funds (ETFs)
- ETFs are easy to understand
- ETFs are transparent
- ETFs are cost-effective
- ETFs are secure
- International Investment Market (esp. US Markets and European Markets)
- Tracking Error
- ETFs tracking DAX
- Mutual Funds vs. ETFs
- Tax Benefits
- Simplicity
- Cost-Effectiveness
- Investing Flexibility
- Low initial investment required
- Trading Flexibility
- ETFs usually have lower expense ratios
- Transparency
- ETFs offer options and short selling
- Transferability
- Index Funds vs. ETFs
- Range of Indexes covered
- Costs
- Tax Efficiency
- Dividends
- Rebalancing
- Dollar-Cost Averaging
- Liquidity
- Trading and Investing Strategies for ETFs
- Trading strategies for ETFs
- Investing with ETFs
- Gaining Industry Exposure with ETFs
- Invest in Commodities through ETFs
- Gain access to International Markets through ETFs
- Bond ETFs
- ETNs-a form of ETFs
- ETFs and the Currency Market
- Selling ETFs
- ETFs to Hedge Risk
- ETFs to Hedge Indexes
- ETF options add to an investor's options
- ETFs role during Earnings Seasons
- Market Index ETFs for Broad Market Exposure
- Industry ETFs Sector Strategies
- Country ETFs for Foreign Market Exposure
- Foreign Currency ETFs for Interest Rate Exposure
- Basic ETF Options for Playing the Earnings Season
- Advanced ETF Options Strategies for Playing the Earnings Season
- Commodity ETF Strategies when Commodities Impact Earnings
- Inverse ETFs for Getting Short without Selling
- Style ETFs
- Investing Strategies with ETFs
- Risk Management
- International Exposure
- Industry Exposure
- Cash Flow Utilization
- Price Discrepancy
- Management Transitions
- Market Analysis
- Empirical Analysis
- Research Methodology
- Return and risk
- Regression analysis
- Tracking Error
- Empirical Data
- Selection and Justification of index funds
- Results and Analysis
- Return and risk
- Regression analysis
- Tracking error
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
The main objective of this dissertation is to determine whether Exchange Traded Funds (ETFs) represent a cost-efficient investment strategy for institutional investors seeking exposure to the DAX index. The research aims to compare ETFs and index funds based on various performance metrics and characteristics.
- Cost-efficiency of ETFs for institutional DAX investment
- Comparative analysis of ETFs and index funds (return, risk, tracking error)
- Evaluation of different investment strategies using ETFs
- Analysis of the German ETF market
- Application of regression analysis to assess fund performance
Zusammenfassung der Kapitel (Chapter Summaries)
Abstract: This abstract provides a concise overview of the dissertation, highlighting the growth of the ETF industry and the increasing investment options available. It states the paper's focus on comparing ETFs and index funds in the German market, examining return, volatility, and tracking error. The abstract concludes by mentioning the hypothesis regarding cost-efficiency and the finding that ETFs offer superior average returns, lower volatility, and better tracking than index funds.
Introduction: This chapter sets the stage for the dissertation by introducing the research hypothesis that ETFs are a cost-efficient investment method for institutional investors in the DAX. It details the research aim, objectives, and rationale. A background on ETFs, index funds, the DAX, institutional investors, and alternative investment options is provided. The chapter concludes with a brief overview of the German ETF market, establishing the context for the subsequent analysis.
Academic Literature Review: This chapter delves into the existing academic literature related to active versus passive investment strategies, the characteristics of ETFs (transparency, cost-effectiveness, security, etc.), and the international investment landscape. It performs a detailed comparison between ETFs and mutual funds, covering aspects like tax benefits, simplicity, cost-effectiveness, flexibility, and transparency. The chapter also compares ETFs and index funds, analyzing factors such as index coverage, costs, tax efficiency, dividends, rebalancing, and liquidity.
Trading and Investing Strategies for ETFs: This chapter explores various trading and investment strategies utilizing ETFs. It covers using ETFs for broad market exposure, industry-specific investments, international diversification, commodity trading, bond investments, currency market exposure, risk hedging, and strategies surrounding earnings season. Different ETF types and their applications are detailed, offering a practical guide to ETF usage.
Empirical Analysis: This chapter outlines the methodology employed in the empirical analysis, including the metrics used (return, risk, tracking error) and the application of regression analysis. The justification for the selection of specific index funds is explained. The chapter lays the groundwork for the results presented in the subsequent chapter, providing a clear description of the research methods and data used.
Schlüsselwörter (Keywords)
Exchange Traded Funds (ETFs), Index Funds, DAX, Institutional Investors, Passive Management, Cost-Efficiency, Return, Risk, Volatility, Tracking Error, Regression Analysis, German ETF Market, Investment Strategies.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this dissertation?
This dissertation investigates the cost-efficiency of Exchange Traded Funds (ETFs) as an investment strategy for institutional investors seeking exposure to the DAX index. It compares ETFs to index funds, analyzing various performance metrics and characteristics.
What are the key objectives of this research?
The key objectives include determining the cost-efficiency of ETFs for institutional DAX investment, comparing ETFs and index funds (return, risk, tracking error), evaluating different investment strategies using ETFs, analyzing the German ETF market, and applying regression analysis to assess fund performance.
What is covered in the literature review?
The literature review explores active vs. passive investment strategies, ETF characteristics (transparency, cost-effectiveness, etc.), the international investment landscape, a detailed comparison of ETFs and mutual funds (tax benefits, simplicity, cost-effectiveness, etc.), and a comparison of ETFs and index funds (index coverage, costs, tax efficiency, etc.).
What trading and investing strategies are discussed?
The dissertation explores various strategies, including using ETFs for broad market exposure, industry-specific investments, international diversification, commodity trading, bond investments, currency market exposure, risk hedging, and strategies for earnings season. Different ETF types and their applications are detailed.
What is the methodology of the empirical analysis?
The empirical analysis uses metrics such as return, risk, and tracking error, along with regression analysis. The selection and justification of specific index funds are explained, providing a clear description of research methods and data.
What are the key findings summarized in the abstract?
The abstract highlights the growth of the ETF industry and increased investment options. It focuses on the comparison of ETFs and index funds in the German market, examining return, volatility, and tracking error. It mentions the hypothesis regarding cost-efficiency and a finding that ETFs offer superior average returns, lower volatility, and better tracking than index funds.
What are the key themes explored throughout the dissertation?
Key themes include cost-efficiency of ETFs, comparative analysis of ETFs and index funds, evaluation of various ETF investment strategies, analysis of the German ETF market, and the application of regression analysis to assess fund performance.
What are the key words associated with this research?
Key words include Exchange Traded Funds (ETFs), Index Funds, DAX, Institutional Investors, Passive Management, Cost-Efficiency, Return, Risk, Volatility, Tracking Error, Regression Analysis, German ETF Market, and Investment Strategies.
What is the structure of the dissertation?
The dissertation follows a structured format including an abstract, introduction (with hypothesis, research aim, and objectives), academic literature review, trading and investing strategies for ETFs, empirical analysis, results and analysis, and a conclusion. It also includes a table of contents and keywords.
What types of ETFs are discussed?
The dissertation discusses various ETF types including market index ETFs, industry ETFs, country ETFs, foreign currency ETFs, bond ETFs, ETNs, and inverse ETFs, along with their application in different investment strategies.
- Quote paper
- Minh Vu (Author), 2011, Exchange Traded Funds (ETF) - Are ETFs a cost-efficient way for institutional investors to invest in the DAX?, Munich, GRIN Verlag, https://www.grin.com/document/187396
