A STUDY ON THE INDIAN EQUITY EXCHANGE-TRADED FUNDS TRACKING BROAD-BASED MARKET INDICES: WITH SPECIAL REFERENCE TO REPLICATION ACCURACY AND THE IMPACT OF RISK SENSITIVITY
DOI:
https://doi.org/10.29121/shodhkosh.v5.i1.2024.2092Keywords:
Exchange-Traded Funds, Equity ETFs, Broad-based Market Indices, Information Ratio, Probabilistic Sharpe Ratio JEL Classification Numbers: G14, G34Abstract [English]
Exchange Traded Fund (ETF) is a blended investment vehicle which functions with the features of both stock shares and index mutual funds, created and redeemed by Authorized Participants (APs). This paper examines the long-run risk-return performance of 23 Indian equity-tracking broad-based indices over a study period ranging from the inception of each respective ETF to March 2024. The empirical analysis employs risk-sensitivity performance measures such as the Information Ratio (IR) and Probabilistic Sharpe Ratio (PSR) to assess the reliability of risk-adjusted returns in relation to fund managers’ ability to outperform the market. Additionally, the study explores the impact of benchmark returns and risk sensitivity on ETF returns.
The Jarque-Bera test applied to the sample returns revealed a non-normal distribution. The results show that 10 out of the 23 ETFs outperformed their benchmarks, demonstrating better risk-adjusted returns based on IR. However, the majority of ETFs exhibited lower PSR values, indicating potential inconsistency in performance. High PSR values for certain ETFs suggest skill-driven returns, while discrepancies between IR and PSR highlight uncertainty in performance stability. This implies that while certain ETFs perform well, the consistency of their performance remains uncertain. Furthermore, the regression analysis reveals that ETF returns are highly influenced by benchmark returns and the IR, indicating that closely tracking the benchmark and managing informational efficiency are key factors in ETF performance. However, the PSR does not have a significant impact on ETF returns.
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