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Q4.      Many investors think it’s relatively complicated to compare XBI and XLF because these two...

Q4.      Many investors think it’s relatively complicated to compare XBI and XLF because these two ETFs have different risk structure and fundamental.

  1. Could you provide a way to measure the performance of these two ETFs?
  2. Which of these two ETFs is relatively undervalued?
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Answer #1

a. Fund selection is an important issue for investors. This topic has spawned abundant
academic literature. Nonetheless, most of the time, these works concern only active
management, whereas many investors, such as institutional investors, prefer to invest in
index funds. The tools developed in the case of active management are also not suitable
for evaluating the performance of these index funds. This explains why information
ratios are usually used to compare the performance of passive funds.

b. XLF is actually undervalued.

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