The commoditisation of financial products : a comparative analysis of passive funds with relation to active funds

Abstract

The Asset Management industry is a highly recognized prosperous industry and it incorporates within its market the passive and the active investment strategies. With the introduction of Passive Investment financial products in the early 1990s, the Asset Management Industry experienced a shift in its clientele. As the 2008 financial crisis unfolded, many Mutual Fund companies closed their doors and filed for bankruptcy, leading to many investors to resort to alternative investment products such as ETFs. Registering returns similar to Mutual Fund, whilst charging lower fees, ETFs are proving to be the perfect substitutes for Mutual Fund investment. This study set out to compare the costs and the returns of several ETFs and Mutual Funds, to conclude whether ETFs can be defined as genuine substitutes of Mutual Funds. It also intended to determine the extent to which prospective investors take fees and past returns of a particular ETF into consideration when choosing between one ETF and another. Five time-series regressions were investigated from which it was discovered that whilst past returns are very much taken into consideration, fees are not. Such results need to be interpreted with caution given that the regression analyses are not very robust. This dissertation emphasises the importance of healthy competition within the Asset Management industry, from which Investors can benefit through lower fees and better investment performance.