AFS Annual Meeting 2018

Explains Hougan (2014), low expenses are the main characteristic that investors look for when selecting an ETF. Challenging this common practice, Hougan develops a compelling theory that it is more important for investors to consider tracking difference, defined as the difference between the net-of-expense return on an ETF and the return on its benchmark index, when they go about selecting an ETF. Inspired by Hougan’s theory, this study examines the impact of both expenses and tracking difference on ETF performance. The relationship between expenses and performance is much stronger than the relationship between tracking difference and performance. This study shows that the slightly positive relationship between tracking difference and performance is attributable to the fact that funds with higher tracking difference tend to have lower expenses.

Author(s): David Nanigian