Green exchange-traded fund performance evaluation using the EU-EV risk model

Abstract

This work evaluates the performance of green exchange-traded funds (ETFs) using the expected utility, entropy and variance (EU-EV) risk model. Data from 14 green ETFs analysed in earlier literature in the in-sample period from January 2008 to December 2010 are used. The green ETFs are ranked according to their risk, considering the returns’ expected utility, entropy and variance, and the best-ranked ETFs are selected to construct equally weighted portfolios. Then, the performance of the green ETFs portfolios is evaluated and compared with those of the S&P500 Index. Cumulative returns in in-sample and out-of-sample periods and performance metrics, such as Maximum drawdown, Sharpe ratio, Sortino ratio, Beta and Alpha, are analysed. The results show that, in general, the equally weighted portfolios formed with half the number of best-ranked ETFs outperform the benchmark index in the in-sample period and for specific time ranges in the out-of-sample periods.