Fire your mutual fund advisor – It is time to invest in ETFs

Abstract

This paper examines the return differences of passive mutual funds and ETFs following the same indexes in the global equity markets from November 2012 to October 2022. We also look more closely on factors that are related to fund fees, including for instance fund company characteristics, fund distribution channels, and geographical factors, and passive investing on a global level. We find that on average, ETFs outperform mutual funds with an economically and statistically significant difference of ca. 0.5% p.a., on average. The outperformance is mostly contributed by lower fees of ETFs, as well as ETFs being on average larger, potentially benefiting from economies of scale. The outperformance of ETFs is consistent virtually in every geographical region, although with varying levels of statistical significance. Overall, the results present notable evidence for the efficiency of ETFs as a passive indexing vehicle, when compared to passive mutual funds. However, when applying these findings to real-world conditions, many location- and investor-specific frictions need to be considered.