the performance of German fixed-income ETFS in the presence of the debt crisis

The German government bonds attract fixed income investors as a safe heaven seeking refuge from the downgraded debt of other Eurozone countries. We exploit this tendency to diagnose the performance behavior of German fixed income Exchange Traded Funds (hereafter ETFs) in line to investment opportunities facing bond investors. In a sample of 38 German bond ETFs during the period from their inception to the end of 2010, we find: 1) ETFs fail to deliver any positive excess return with respect to the market return and this persist on a quarterly basis, 2) ETFs are associated with negative alphas, 3) a small size and a momentum effect on bond ETF returns, and 4) a statistically significant tracking error of 0.06% which is persistent on a quarterly basis. Overall, our results provide the first empirical evidence on how German bond ETFs behave with respect to the benchmarks and imply that fixed income investors using German bond ETFs should apply allocation strategies to benefit from the size and momentum effects found.