Do exchange traded funds outperform mutual funds?

Abstract

In this paper I use data of actively managed open-end mutual funds and passive exchange traded funds that are categorized as European equity funds by Morningstar to compare the performance between the two. I find that when looking at gross returns, mutual funds investing in large capital underperform their benchmarks and those investing in small to medium capital overperform. ETFs on average do not generate statistically significant 4-factor alphas when using gross returns. Using net returns causes all categories to underperform their 4-factor benchmarks. After fees large capital ETFs outperform their mutual fund counterparts and small/medium capital ETFs are slightly beaten by the active mutual funds. I also find evidence of larger funds performing better than smaller funds in all categories. Best performance overall is with the Large equity investing ETFs.