Exchange-Traded Funds: Are Excess Returns Normally Distributed?

In today’s asset management world, exchange-traded funds (ETFs) play a crucial role. When reviewing their performance against the benchmark, it is often assumed that any excess returns are normally distributed. The aim of this article is to check the assumption of normal distribution for excess returns for ETFs. The authors show that for a considerable number of ETFs this assumption does not hold true. Furthermore, the authors show how false assumptions regarding the distribution of the excess returns might affect the risk estimation with respect to the excess returns.