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1 Introduction
Exchange-traded funds (ETFs) are hybrids of ordinary corporate stocks and open-ended mutual funds which invest in baskets of shares aiming at closely replicate the performance and risk levels of specific broad, sector and international equity, fixed income and commodity indexes. The majority of ETFs currently available worldwide is passively managed with the exception of the actively managed ETFs listed on Deutshe Boerse and the recently launched active ETFs in the US market[1] .
The reason why active ETFs are not widely available yet relates to the arbitrage opportunities offered by passive ETFs but not offered by active ETFs. Arbitrage chances arise when a declination between the trading prices of ETFs and the value of underlying securities exists. The efficient arbitrage execution contributes to the narrowness of these divergences. Arbitrage bases on the in kind creation/redemption process of passive ETFs and it is attainable because the holdings of the tracking market indexes are publicly known throughout the trading day. In contrast, the stocks held by the actively managed ETFs are not publishable information until the end of the trading day because these stocks are picked by active ETFs so that they can beat the benchmark index. Therefore, if the holdings of active ETFs are disclosed frequently enough so that arbitrage could take place, their ability of beating the market weakens. In such a case, investors would simply let the fund managers do all of the research waiting for the disclosure of their choices and they would then buy the selected securities avoiding paying the management fees. Thus, the arbitrage and the in kind creation/redemption are non-events for active ETFs.
The passive management for the majority of ETFs entails that they just invest in all the components of the underlying index at the same weights without needing to execute any complex and costly investing strategies and without expecting, however, to produce any excess return with respect to the performance of the tracking benchmark. In contrast to this universal assertion regarding the passively managed ETFs, there are now some reports that suggest that an actively managed portfolio of ETFs can generate a positive alpha, in other words, to outperform its individual funds.
For instance, [12] Carty and Carty (2008) argue that an actively managed portfolio of...