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Costly index investing in foreign markets

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  • Pedraza, Alvaro
  • Pulga, Fredy
  • Vasquez, Jose

Abstract

We study trading behavior and performance of foreign investors by level of active management. Using a comprehensive Colombian dataset with complete transaction records, we find that aggregate underperformance of foreign investors is attributable to passively-managed foreign funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index. Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity.

Suggested Citation

  • Pedraza, Alvaro & Pulga, Fredy & Vasquez, Jose, 2020. "Costly index investing in foreign markets," Journal of Financial Markets, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finmar:v:51:y:2020:i:c:s1386418119300485
    DOI: 10.1016/j.finmar.2019.100509
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    More about this item

    Keywords

    Foreign investors; Index funds; Performance; Transactional data;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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