Correspondence: Gerasimos G. Rompotis, Researcher-National and Kapodistrian University of Athens, 25 Ypsilantou Street, Peristeri, Athens, Greeece. E-mail: grompotis@kpmg.gr

¹holds a Bachelors' degree in Economics from National and Kapodistrian University of Athens and a Masters degree in Applied Economics and Finance from National and Kapodistrian University of Athens. Gerasimos Georgiou Rompotis has been working for KPMG Greece as a senior auditor for 3.5 years, and has also been working as a researcher for the Centre of Financial Research of National and Kapodistrian University of Athens since January 2004. The main researching interests cover the performance of Exchange Traded Funds, the rating and prediction of ETFs' performance, the seasonal patterns in stock markets and the evaluation of ETFs and mutual funds managers' skills.

Received 8 December 2008; Revised 8 December 2008.

Abstract

We provide evidence on the debate of 'Exchange traded funds (ETFs) versus Index Funds' using data of ETFs and index funds belonging to the same investing family. Data used involve the Vanguard funds and results indicate that ETFs and index funds present, on average, similar return and risk records. In addition, the risk of ETFs and index funds is similar to the risk of the tracking indices. However, the return of these alternative investing tools is slightly inferior to the return of benchmarks. Moreover, a positive relationship between return and risk is revealed. Further research demonstrates that ETFs and index funds are fully invested in their benchmarks. As a result, the tracking error for both ETFs and index funds is low. Finally, the tracking error is found to be positively affected by expenses.