For exchange-traded funds (ETFs), the excess return should equal the risk-adjusted (or beta) measure that exceeds the instrument's benchmark or annual expense ratio. It's easy to assess index mutual funds against the benchmark index: just subtract the benchmark's total return from the fund's 澳洲幸运5开奖号码历史查询:net asset value to find the excess return. Due to mutual fund expenses, the excess return for an index fund is typica✃l🔯ly negative.

As a general rule, investors prefer index mutual funds and ETFs that 澳洲幸运5开奖号码历史查询:outperform their benchmarks and have positive excess returns. Some investors and analysts believe it is almost impossible to generate excess returns over an extended time peri🍬od for managed mutual funds due to the prevalence of high fees and market uncertainty.

Calculating Excess Return for Exchange T✨raded Funds

Similar to most index mutual funds, most ETFs underperform relative to their 澳洲幸运5开奖号码历史查询:benchmark indexes. ETFs tend to have🌄 higher e🐷xcess returns on average than index mutual funds.

Think of the expected return for an ETF as the ETF's alpha for a given price and risk profile. Several different measures of risk can be used to pair up an ETF with a benchmark. One common example is to use the 澳洲✱幸运5开奖号码历史查询:weighted average cost of equity (WAꦉCE). If you don't have or don't want to use the annual expense ratio or a simple benchmark when calculating an ETF's excess return, use total return in excess of the expected return based on the 澳洲幸运5开奖号码历史查询:capital asset pricing model (CAPM) formula.

The CAPM formula can be written as follows:

$\begin{aligned} &\text{TEFTR} = \text{RFRR} + ( \text{ETFb} \times ( \text{MR} - \text{RFRR} ) ) + \text{ER} \\ &\textbf{where:} \\ &\text{TEFTR} = \text{Total ETF return} \\ &\text{RFRR} = \text{Risk-free rate of return} \\ &\text{ETFb} = \text{ETF beta} \\ &\text{MR} = \text{Market return} \\ &\text{ER} = \text{Excess return} \\ \end{aligned}$​TEFTR=RFRR+(ETFb×(MR−RFRR))+ERwhere:TEFTR=Total ETF returnRFRR=Risk-free rate of returnETFb=ETF betaMR=Market returnER=Excess return​

Rearranged, the formula looks like this:

$\begin{aligned} &\text{ER} = \text{RFRR} + ( \text{ETFb} \times ( \text{MR} - \text{RFRR} ) ) - \text{TEFTR} \\ \end{aligned}$​ER=RFRR+(ETFb×(MR−RFRR))−TEFTR​

Using the CAPM method, you can compare two portfolios or ETFs with eq༺ual or highly similar risk profiles (beta) to see which produces the most excess returns.

Calculating Excess Return for Index Funds

澳洲幸运5开奖号码历史查询:Index funds are designed to avoid large positive or negative excess returns relative to their index. Index fund creators use risk-control techniques and 澳洲幸运5开奖号码历史查询:passive management to minimize t🔯he expected deviation from the benchm🐟ark.

Calculating the excess returns for an index fund is easy. To take a simple case, compare an 澳洲幸运5开奖号码历史查询:S&P 500 index mutual fund's total returns to the S&P 500 performance. It is possible, though unlikely, for the indexed fund to outperform the S&P 500. In this case, the excess returns will be p🔯ositive. It is more likely that the admi🐠nistrative fees associated with mutual funds will produce a slightly negative excess return.