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Do passive ETF fund managers care about portfolio metrics such as Sharpe ratio and Sortino ratio?

I understand hedge fund managers care about these risk metrics for their investors. What about the managers who manage passive ETFs such as SPY, QQQ? Do these metrics matter to their performances?

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Portfolio risk metrics matter a lot for all fund managers. Though certain type fund vehicles can have completely different sets of performance metrics. It's hard to imagine a Venture Fund analyzing their portfolio using Sharpe and Sortino.

Passive ETF funds probably care about Asset Under Management (AUM), inflow/outflow, and top allocation the most. Since they don't trade actively, the active volatility metrics of their portfolio would just be the same as the fund's underlying asset. It's at their investors' discretion to manage risks. They do not manage risks for you.

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The Sharpe ratio and the Sortino ratio are not under the control of the ETF managers, they will be equal (or very close) to the ratios for the Index that the ETF tracks. There is not much room for differentiation here.

To make their ETF attractive to customers, fund managers care about the tracking error between their fund and the index. They would like their ETF to track the Index as closely as possible. They will be monitoring this and taking steps to improve the tracking if necessary.

Similarly they also care about the bid/ask spread for the ETF and the discount/premium to NAV. Although they do not control this directly, they will be monitoring the situation and keeping in touch with the Authorized Participants and Market Makers to ensure the trading cost and NAV vs Price error are small, which will attract customers. If necessary they can encourage additional AP and MM to get involved.

Of course what all money managers care most is having a large AUM, since they are paid a percentage of AUM. They will try to market their fund to attract additional customers and their AUM. Perhaps their marketing materials will mention the Sharpe Ratio and the Sortino Ratio, but it is not a key metric as far as passive ETFs managers are concerned.

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Passive ETF Performance Metrics:

Tracking Error

  • % of days closing price substantially above NAV
  • % of days closing price substantially below NAV

Liquidity

  • Median bid/ask spread based on NBBO (explains why funds prefer smaller prices)
  • Avg Daily Volume (ADV), as well as ADV/shares issued

Costs

  • Expense ratio

Misc

  • Consolidated ESG metrics

The ESG part is relatively new and is valuable since this information may not be readily available from the portfolio companies or from the index provider in case of Index ETFs.

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