Model What You Trade?
July 13, 2011 - Big Ideas
Do strategies modeled using major indexes translate cleanly to the exchange-traded funds (ETF) that track them? ETF returns may deviate from underlying index levels because: (1) ETFs incorporate trading frictions from rebalancing and management fees; (2) ETF composition may differ slightly from that of the underlying index due to trading cost considerations; (3) ETFs accumulate dividends in a non-interest bearing account for periodic lump sum distribution; and, (4) ETFs trade until 4:15 p.m., while indexes close at 4:00 p.m. To investigate, we compare return distribution statistics over rolling 52-week histories for three index-ETF pairs:
SPDR S&P 500 (SPY) versus S&P 500 Index, since late January 1993.
SPDR Dow Jones Industrial Average (DIA) versus Dow Jones Industrial Average (DJIA), since late January 1998.
PowerShares QQQ (QQQ) versus NASDAQ 100 Index, since early March 1999.
Using weekly closes for both indexes and dividend-adjusted ETFs from ETF inception through June 2011, we find that: Keep Reading