ACTIVE MANAGEMENT: NEW EVIDENCE FROM EXCHANGE TRADED FUNDS

INTRODUCTION
Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. In 1993, the first ETFs launched on the American Stock Exchange were the S&P Depositary Receipts also known as Spiders. In December 2001, India began its foray into the sphere of exchange traded funds. ETF Nifty BeES, the Nifty Benchmark Exchange-traded Scheme was the first Indian ETF launched in the country.

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ETFs are very popular abroad with nearly 60% of trading volumes on the American Stock Exchange (AMEX) captured by ETFs. At the end of March 2008, there were over 1280 ETFs with assets of US$ 760.80 billion managed by 79 managers across 42 exchanges around the World. Among the popular ones are :
 SPDRs - The S&P 500 Depository Receipts were the first ETFs to be in the market in 1993. SPDRs track the S&P 500. There are select sector SPDR funds available. These are traded on the AMEX.  QQQs - Popularly known as Cubes, they are listed on the NASDAQ and track the NASDAQ -100. It is one of the most liquid ETFs.  TRAHK - Trahks is listed on the Stock of Exchange of Hong Kong and the investment objective is to provide investment results that closely correspond to the performance of the Hang Seng Index.

HOW ACTIVE AND PASSIVE ETFS DIFFER?

An actively managed ETF will have a benchmark index, but managers may change sector allocations, market-time trades or deviate from the index as they see fit. This produces investment returns that will not perfectly mirror the underlying index. Passive ETFs are similar to unit investment trusts (UITs) in that their portfolios are reset at regular intervals. They do not generate internal capital gains like actively-managed funds. Passive ETFs will typically have much lower fees than those associated with their actively-managed counterparts. Motilal Oswal (MO) one of the larger stockbrokers in India has launched its first structured product the MOSt Shares M50, which is an actively managed exchange traded fund (ETF).

LITERATURE REVIEW
Prior analytical studies suggest that uninformed investors strictly prefer trading ETFs to trading individual stocks in order to avoid trading against informed investors. Compared to Actively Managed Mutual Funds, Active ETFs gives the tax advantage Active ETFs was more transparent for their daily disclosure requirement. Active ETFs have a lower expense ratio. Active ETFs have enough daily trading liquidity. (Daley, 2010)

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The active ETFs' objective was to get a higher rate of return more than a benchmark rate of return, so the portfolio manager of Active ETFs must take a active trading strategy rather than a passively replicating an index. According to Weiwei Zhang and Haiyong Ma (2010) , stringent requirement on daily disclosure of holdings for the Active ETFs will bring severe challenge to its development, especially on the front running and the motivation of the portfolio managers to disclose the information. For the requirement about the daily disclosure of holdings, the regulations of these countries are different.
Eg. United States, the regulations require Active ETFs to provide daily disclosure of holdings, albeit with a one-day lag.

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Gerasimos G. Rompotis (2009) analysed the performance of 3 ETF launched in US market. They assess market returns by alternatively using the benchmark assigned to each ETF and the Standard and Poor s 500 Index. Their results shows that the active ETFs fail to beat the market. According to Blake et al. (1993), Malkiel (1995), Gruber (1996) , The actively managed portfolios, on average, do not produce better returns than the market indexes or the passively managed index funds. The authors connect the inability of managers to beat the market with the increased expenses incurred by the active management.

METHODOLOGY
Active ETF The active ETF is MOSt Shares M50 . Passive ETF The Passive ETF is Nifty BeES based on S&P CNX Nifty.

Active ETFs were first introduced in The history of passively managed ETFs India by Motilal Oswal mutual fund. is much longer. MOSt Shares M50 is India's 1st Nifty BeES is the first scheme launched Fundamentally Weighted ETF based on by Benchmark and India's first ETF. It is S&P CNX Nifty. based on the popular S&P CNX Nifty Index. weighing combines the features of both The investment objective of Nifty active fundamental based investing and Benchmark Exchange Traded Scheme passive execution. (Nifty BeES) is to provide investment returns that, before expenses, closely correspond to the total returns of the securities as represented by the S&P CNX Nifty Index.

DATA ANALYSIS
Descriptive Statistics
Active ETF Names Symb Mean Median Stddev. Min Max Obs. MOSt Shares M50 0.92 -0.02 1.19 -6.00 3.31 217 Passive ETF Nifty Bees Nifty BEeS 0.91 0.00 1.15 -3.24 3.50 217 Index S&P CNX Nifty Nifty 50 0.92 0.01 1.19 -6.02 3.32 217

The results indicate that the equity active ETF M50 is unable to outperform both its benchmark index and corresponding passive ETF. Looking at values of standard deviation and minimum & maximum daily return, it can be observed that actively managed ETF is riskier than the passive ETF.

PERFORMANCE REGRESSION RESULTS

Active ETF Name Symb Underlying Alpha T-test P value S(Beta) T-test P value R2 Adjusted R2 MOSt Shares M50 S&P CNX Nifty 0.08158 -0.2706 0.7869 0.6844 -1.224 -0.2224 0.0075 0.0025 Passive ETF Nifty Bees Nifty BEeS S&P CNX Nifty 0.00882 -0.538 0.5912 0.0074 134.369 0.0001

0.9891 0.9891

According to the results, both active and passive ETF do not produce any material abovenormal return. The alpha estimates of each active and passive ETF is low while the statistical of the estimate is poor. Considering the beta coefficients, the beta of the active ETF is higher than the beta of passive ETF. Whereas, it is inferior to the beta of passive ETF in light of statistical significance depicted through t values. Finally, as indicated through adjusted R2 values passive ETF Nifty BEeS is a better replica of the underlying index than active ETF M50.

CONCLUSION
The active ETF basically underperform the market indexes and the passively managed ETF. In regression analysis we found that beta coefficient for active ETF is insignificant. While passive ETF managers are simply to follow the market but active ETF managers are supposed to time the market efficiency so as to help the portfolios they manage to perform the market return. our findings indicate that the active ETFs fail to do what they are required to do.

REFERENCE
Gerasimos G. Rompotis. (February 2009) Active vs. Passive ETF: In ssrn e-library, http://www.ssrn.com/abstract=1337708 Weiwei Zhang, (December 2010). Development of Actively Managed Exchange Traded Funds and the Revelation to Chinese Financial Market , International journal of financial research. Greene, A. (2010). The Challenges of Servicing the Growing ETF Market: Research report, State Street Global Services Nigam, S. (2010). Active ETF And Passive ETF Can Co-Exist: InFocus Articles, http://www.dailymarkets.com/author/shishirnigam/ Online ETF price watch: http://www.nseindia.com/content/etfsparks.htm NSE web site: www.nseindia.com