PT  - JOURNAL ARTICLE
AU  - Sharon Garyn-Tal
TI  - Explaining and Predicting ETFs Alphas: &lt;em&gt;The R&lt;sup&gt;2&lt;/sup&gt; Methodology&lt;/em&gt;
AID  - 10.3905/jii.2014.4.4.019
DP  - 2014 Feb 28
TA  - The Journal of Index Investing
PG  - 19--32
VI  - 4
IP  - 4
4099  - https://pm-research.com/content/4/4/19.short
4100  - https://pm-research.com/content/4/4/19.full
AB  - The stated objective of exchange-traded funds (ETFs) is to hit their benchmarks. However, previous research identifies potential difficulties that arise for ETF managers attempting to exactly replicate the returns of the target benchmark and suggests that the flexibility associated with passive investment management can add value for investors. In this article, I expand the results of Amihud and Goyenko [2012] and examine whether R2, as a measure of flexibility or active management, can explain ETF alphas, and whether it also can predict ETF performance. Examining 88 ETFs from 2000–2012, I find that 1 – R2 positively affects ETF performance. I also find that 1 – R2 is a significant predictor of ETF alphas and that the R2-based investment strategy in ETFs earns a significant positive risk-adjusted excess return.TOPICS: Exchange-traded funds and applications, performance measurement