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In the period from 2007 to October 2017, exchange traded funds (ETFs) exhibited an exceptional growth in assets under management from 0.8 to 4.4 trillion US-Dollar, causing significant developments within the financial industry that raised concerns regarding their negative impact on market quality and systemic risk. This work examines the development of ETFs and evaluates their effects on the financial system by conducting an analysis of secondary research and market data. Thereby, the findings do not recognise a significant risk stemming from ETFs, but in fact identify multiple necessary areas of research. Firstly, it is demonstrated that the growth of ETFs benefits investors through their stimulating effect on competition within the fund industry, as well as their essential role in robo-advise. Moreover, the alleged negative effect of passive ETF investments on companies’ corporate governance are examined and in fact turn out to exhibit a positive impact. Furthermore, it is shown that ETFs deteriorate liquidity and information efficiency of their underlying stocks in the long run, yet there has been no examination of the implications so far. Lastly, it becomes apparent that the pricing mechanism of ETFs requires further exploration as there are proofs of an inherent capability of transferring and amplifying liquidity shocks between ETFs and their underlying assets, causing price distortions and drops.
The objective of this paper is to examine the return and risk performance of 155 equity mutual funds that provide exposure to the BRIC-Countries and eleven corresponding exchange-tradedfunds from January 2009 until December 2014. The performance proxies are mean returns and risk-adjusted returns using Sharpe Ratio and Jensen’s Alpha. In addition to that, Tracking Errors for the exchange-traded-funds have been calculated. Further benchmarks for comparison are the following indices of Morgan Stanley Inc.: MSCI World, MSCI Emerging Markets, MSCI BRIC and the corresponding MSCI Country Index. The results show that all funds, equity mutual funds and exchange-traded-funds, could realize positive mean returns, whereas the returns of the exchange-traded-funds are lower than those of the equity mutual funds. Nevertheless, none of the funds could realize a Sharpe Ratio higher than one, which would implicate that the return has compensated for the risk. The results of Jensen’s Alpha suggests that 80% of the equity mutual funds were able to add value, as indicated by their positive alpha. Only two out of eleven exchange-traded-funds could generate a positive alpha. This result is controversial to the results of other studies, where only some or none of the examined funds have been able to add value.