Hey Community,
in case of bachelor thesis i research the passive vs active investment discussion. I have to prove, that in most of cases etfs are better than mutual fund (total return). Do any of you have an idea how i can prove that?
Anyone knows researches about this theme ? (i know the S&P DJ Indices Study but i need researches with comparison of the total return)
Kind regards
Nico
Nico Lippe
You can use risk-adjusted return comparison tools such as Sharpe Ratio, Treynor Ratio or Sortino Ratio to explain your work. These ratio measures risk differently, so please consider that in advance before selecting the tool.
I don't know if it's true. But you could compare equivalent type funds and if the ETF has lower fees it will probably do better.
Another factor to consider is to take an appropriate benchmark index for doing the comparison. I would suggest narrowing down to only one type of marketcap - say largecaps and then do the comparison. So, it will be more like Active Largecap MFs vs Passive Largecap ETFs
One point you can show is how gradually, over the years, the passive funds are improving their edge over active funds.
Also consider reading Conference Paper Growth and Development of Exchange Traded Funds in India
Given for granted that ETFs would have an alpha which is equal to zero, using a factor analysis, you can test whether the mutual fund have an insignificant alpha too, and after you can compare the total expense ratios. However, it is always useful to highlight the financial stability concerns related to too large ETFs (usually stocks tend to become more volatile when they are owned by ETF), and the issues which they bring from a corporate governance perspective.
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