Abstract

Exchange-traded funds have experienced rapid growth in the last twenty years. We compare the performance of these funds to competing closed-end funds in the international equity investment setting. Expense ratios, turnover, risk, and return are examined over a ten year period ending in 2012. The expenses and turnover rates for exchange traded funds were significantly lower. However, closed-end fund returns after deducting expenses were significantly higher both unconditionally as well as on a risk-adjusted basis. Our findings suggest that unless the tax consequences of higher turnover are extreme, investors should forego the much hyped-lower expenses of exchange-traded funds and focus on the higher returns produced by closed-end funds.

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