Do ETFs outperform CEFs in fixed income investing?

Abstract

Purpose

For a number of reasons ranging from their more recent introduction to their perceived lesser excitement relative to stock-based peers, there have been few studies of fixed income (mainly bond) exchange-traded funds (ETFs). The purpose of this paper is to fill the void by comparing performance measures of fixed income ETFs to fixed income closed-end funds (CEFs).

Design/methodology/approach

This paper examines operating characteristics as well as risk and performance measures of all available fixed income ETFs and CEFs in the USA over the last five and ten years ending on December 31, 2014. Operating characteristics include expense ratios, annual turnover rates, tax cost ratios, and tracking error ratios. Performance measures include average annual returns, risks (measured by standard deviations), and risk-adjusted returns (measured by Sharpe ratios and Sortino ratios).

Findings

This study finds material and significant difference in a variety of expenses, return measures, and risk measures. Sharpe and Sortino ratio significance is highly dependent on whether net asset values or market values serve as the dependent variable. ETFs would be the preferred choice of fixed income investors who are presumed to be focussing on market-based return measures.

Originality/value

This paper empirically compares operating characteristics as well as risk and performance measures of US fixed income ETFs and fixed income CEFs in the same Morningstar categories over the last five and ten years.

Citation

Chang, C.E., Krueger, T.M. and Witte, H.D. (2015), "Do ETFs outperform CEFs in fixed income investing?", American Journal of Business, Vol. 30 No. 4, pp. 231-246. https://doi.org/10.1108/AJB-04-2015-0013