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Exchange Traded Funds

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Exchange Traded Funds are similar to conventional index mutual funds, but they are purchased like a stock.

William J. Bernstein, "The ETF vs. Open-End Index-Fund Shootout," Efficient Frontier, Fall 2001.

William J. Bernstein, "It's the Execution, Stupid!," Efficient Frontier, Winter 2004. This article finds that the best index funds have tended to outperform "equivalent" ETFs even without considering the costs of bid-ask spreads and commissions which apply to ETFs, but not index funds.

Edwin J. Elton, Martin J. Gruber, George Comer, and Kai Li, "Spiders: Where are the Bugs," Journal of Business, July 2002, pp. 453-472. This paper analyzes the performance of one of the first Exchange Traded Funds, the S&P 500 SPDR.  It finds that this ETF underperforms similar low cost index mutual funds by 0.18 percentage points per year.  This underperformance is principally due to the fact that SPDRs (unlike most more modern ETFs) are required to hold dividends received from their underlying stocks in cash until distribution to shareholders.

Robert Engle and Debojyoti Sarkar, "Pricing Exchange Traded Funds," NYU Stern Working Paper, May 2002 (172kb). An interesting paper.

James L. Novakoff, "Exchange Traded Funds: A White Paper," Indexfunds.com, February 24 2000. A good history and overview of ETFs.

Jim Novakoff, "Diamonds in the Rough: The 10 Keys To Building Sound ETF-Based Portfolios," Journal of Indexes, Third Quarter 2002.

Scott Rasmussen, "Going Long with Baskets: A cost-comparison of exchange-traded funds," Stanford University Honors Thesis, December 9 2002 (1.38mb). An interesting paper comparing ETFs to conventional index mutual funds.

Steven Schoenfeld, J. Lisa Chen, and Binu George, "ETFs offer the World to Investors," A Guide to Exchange-Traded Funds, Fall 2001, pp. 111-118. "Index based strategies are the most efficient way to gain international exposure, and should outperform the average actively managed fund."

John Spence, "New Study Examines Domestic, International ETF Premiums and Discounts," Indexfunds.com, February 14 2002. This article discusses a study which quantifies the bid-ask spreads and market premiums for ETFs.

John Spence, "Joined at the Hip – Vanguard’s VIPERS and index funds," IndexUniverse.com, November 11 2003. This excellent article discusses why Vanguard's ETFs may have a slight advantage over other ETFs.  You may have to register (for free) to view this article (also, see this article in the Journal of Indexes).

"Another Look at ETF Premium Discounts and Spreads," Indexfunds.com, April 3 2002.

"ETF Liquidity Myth Dispelled," ETFZone.com, November 6 2003. Good discussion of what drives bid-ask spreads of ETFs.

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