FACTORS AFFECTING INDEX REPLICATION INVESTMENT OF INDEX FUNDS AND EXCHANGE TRADED FUND (ETF) IN THE STOCK EXCHANGE OF THAILAND

Abstract

The objective of this study is to analyze factor affecting the investment performance of the index replication of the stock index fund and ETFs with a passive approach strategy. This study examined the factors affecting the fund management performance using tracking errors (TE). The first definition of TE is defined as the absolute difference in returns between the fund and the benchmark index. The second way to measure the TE is using the Standard Deviation of return differences between the fund and the benchmark index. The third way to estimate the TE is using the Standard Error of Regression (SER) in the estimate of Capital Asset Pricing Model (CAPM) and finally TE by using the value of 1-R2 of CAPM. Independent Variables this study include the percentage change of Net Asset Value of the stock index fund and ETFs, the size of the stock index fund and ETFs measured by total assets, the expense ratios, the dividend and the Portfolio Turnover Ratio of the stock index fund and ETFs. To test the significance of these five variables in explaining tracking error, this study analyses the data of 20 stock index fund and 9 ETFs. Daily prices were collected from January 1, 2013, to June 30, 2016. Findings reveal that the factor which has the highest impact on the index replication investment strategy is the dividend which shows positive correlation coefficient. In addition, the study also found that some fund managers used the inappropriate index for investment, which provides low tracking errors and may not reflect the actual fund performance. It may lead to misunderstanding for the investor about the efficiency and performance of the funds and the fund managers. This demonstrated that most fund managers have efficient performance in reference to the SET index below the standard line and it may reflect that most fund managers cannot perfectly replicate the SET index performance.