In this paper,1 we evaluate the performance of fixed income ETFs. We find that Treasury ETFs are indeed able to track their benchmarks but that investment grade corporate bond ETFs underperform their benchmarks and high yield corporate bond ETFs severely underperform their benchmarks.
We provide evidence that the transaction costs of the underlying bonds are a key determinant of an ETF’s underperformance. We conclude that indices consisting of bonds that are more costly to trade are more difficult to track.
1 Houweling, P., 2012, ‘On the performance of fixed-income exchange-traded funds’, The Journal of Index Investing.
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