Creating Optimal Risk-Return Portfolios With Arbitrage Mechanism Using Exchange Traded Funds

Abstract

Exchange traded funds (ETFs) are one of the latest financial innovations widely regarded as significantly better investments than mutual funds due to their lower fee structure and tax efficiency. This study empirically examines the construction of the optimal portfolio based on the mean-variance optimization model (Markowitz 1952) of selected exchange traded funds listed on 30 iShares US ETFs of different sectors from four different benchmark types (Russell 1000, Dow Jones, S&P Global 1200 and MSCI Emerging Markets) for the period from 2013 to 2023 (weekly). Individual investors are increasingly using ETFs that track the most popular stock indices to achieve their investment goals. This means that investors use these ETFs to replace index funds in their long-term portfolios. The results of our study in this article can help them make better decisions, as we show the best portfolio among the top 30 iShares ETFs according to investors' risk appetite.