An Empirical Study On ETF Performance Evaluation In China

Exchange-traded Funds, or ETF, is a new investment tool grew up in1990s.Since the establishment of our country’s first ETF—50ETF, the ETF market hasachieved rapid development. Up to feb28th,2014,85ETFs have been set up in China,and83of them have been listed in Shanghai or Shenzhen Exchanges. ETF is a kind ofpassive investment, it’s a collection of the advantage of open-ended funds,closed-ended funds, as well as traditional index funds, with dual transactionmechanism. Investors can only purchase ETF shares with stocks and redempt ETFshares in exchange for stocks. Compared with traditional index funds, ETF has alower cost. It’s considered to be one of the most important financial innovation in thepast more than ten years. The purpose of this paper is to make comprehensiveevaluation of ETF and give advice to help investors to choose ETF for themselves.This dissertation begins with the developing history of ETF all over the world，then we use the system of performance evaluation and the indexs from the scholarsbefore according to the characteristics and principle of ETF. We evaluate theperformance of ETF from three aspects: risk-adujusted returns, operational efficiencyand market performance. The empirical research is divided into three parts: therisk-adjusted returns of ETF and traditional index funds, the operational efficiencyand market performance of different ETFs and the overall performance of all theETFs. Firstly, we measure the risk-adjusted returns by Sharpe ratio, compared withtraditional index funds, and we select three sample period with three different marketconditions to explore the influence of different market situation on the performance ofETF and traditional index fund. Secondly, we make empirical researches on thetracking ability based on the data of46ETFs, whch went public beforedecember,2012. The tracking ability is measured by the tracking difference andtracking error. And we use discount/premium ratio and liquidity ratio to evaluate thearbitraging effenciency of ETF. Finally, in order to get a more comprehensiveevaluation results, we further analyze the overall performance of all46ETFs by ratingevaluation.Based on the above analysis, we can conculde: In the ballooning and decliningcondition, the risk-adjusted returns of ETF is superior to the traditional index funds, especially for the active sector,such as GEM in2013. But if the turbulent fall occurs,ETF doesn’t perform better than traditional index funds. It’s a better chioce forlong-term investors to choose the ETFs according to the past performance of fundmanagers. On the other hand, for the arbitrage investors, it may be wise to keep aneye on the ETFs, which either set up earlier or track a representative index, such asHS300index. These ETFs often have a lower arbitrage cost, which will benefit thearbitrage to a certain extent.