On the Performance of Fixed Income Exchange Traded Funds

We evaluate the performance of fixed income Exchange Traded Funds (ETFs). We find that Treasury ETFs are indeed able to track their benchmarks, but that Investment Grade corporate bond ETFs underperform their benchmarks and High Yield corporate bond ETFs even severely underperform their benchmarks. We provide evidence that the transaction costs of the underlying bonds are a key determinant of an ETF's underperformance. We conclude that indexes consisting of bonds that are more costly to trade are more difficult to track