This study examines the impact of both expense ratio and tracking difference on exchange-traded fund (ETF) performance. The relationship between expenses and performance is much stronger than the relationship between tracking difference and performance. This study shows that the slightly positive relationship between tracking difference and performance is attributable to the fact that funds with stronger tracking difference tend to have lower expenses. The practical implication of this study is that low costs should be the main characteristic that financial service professionals look for when selecting ETFs for clients.
David Nanigian, PhD, CFP, is an associate professor of finance in the Mihaylo College of Business at California State University, Fullerton, and the director of the college’s CFP Board-Registered Professional Certificate in Personal Financial Planning program. His research focuses on investment vehicles and is frequently cited in global media outlets such as The Wall Street Journal, The New York Times, and the Associated Press. Nanigian earned CFP certification in 2016, and received his PhD from Texas Tech University in 2010.