How does the Introduction of an ETF Market with Liquidity Providers Impact the Liquidity of the Underlying Stocks?.

This article examines how the inception of an ETF market impacts several dimensions of the liquidity of the ETF-underlying-index stocks. In contrast with previous research, our evidence is based on an ETF market where liquidity providers (LPs) act as market makers. We find that: (1) the market for the underlying stocks becomes more liquid after the ETF ntroduction for investors who trade at the best-limit quotes; (2) but the stock market becomes ess deep for larger traders, most probably because some large liquidity traders exit the underlying stocks’ market for the ETF market. Some statistics suggest that those results could be related to the trading activity of ETF LPs.Transaction Costs; Exchange-Traded Fund (ETF); Index Trading;

The Introduction of the CAC40 Master Unit and the CAC40 Index Spot-Futures Pricing Relationship.

Efficiency; Arbitrage; Futures; ETF;

The Great ETF Tax Swindle: The Taxation of In-Kind Redemptions

Since the repeal of the General Utilities doctrine over 30 years ago, corporations must recognize gain when distributing appreciated property to their shareholders. Regulated investment companies (RICs), which generally must be organized as domestic corporations, are exempt from this rule when distributing property in kind to a redeeming shareholder. In-kind redemptions, while rare for mutual funds, are a fundamental feature of exchange-traded funds (ETFs). Because fund managers decide which securities to distribute, they distribute assets with unrealized gains and thereby significantly reduce the future tax burdens of their current and future shareholders. Many ETFs have morphed into investment vehicles that offer better after-tax returns than IRAs funded with after-tax contributions. Furthermore, this rule is now being turbocharged. Some mutual fund families have created ETF classes of shares for some of their mutual funds, which permits the ETF shareholders to remove the gains attributable to the shareholders of the regular share class. Another firm acts as a strategic investor to assist mutual funds in eliminating their unrealized gains through contributions and redemptions. These transactions permit current and future fund shareholders to inappropriately defer tax on their economic gains and give ETFs and other mutual funds with ETF share classes a significant tax advantage over other investment vehicles. This article considers various options that tax policymakers should consider to eliminate the ETF tax subsidy including explicitly extending this favorable tax treatment to all RICs by exempting fund-level gains from tax, repealing the exemption rule, limiting the amount of unrealized gains a fund can distribute, requiring ETFs to reduce the basis of their remaining property by the unrecognized gain of distributed property, or requiring ETFs to be taxed as partnerships

Passive investing before and after the crisis: investors' views on exchange-traded funds and competing index products

Investment in exchange-traded funds (ETFs) has been remarkably robust in the course of the recent financial crisis. This paper analyzes investors' perceptions of ETFs and other indexing products by comparing the answers to two surveys of ETF users carried out in 2008 and 2009, before and after the height of the financial crisis. We find that the crisis has divided the ETF market in two segments. Whereas ETFs in standard asset classes have been unaffected by the crisis, ETFs for alternative asset classes face challenges. However, ETFs are generally well ranked in comparison to other indexing products – presumably because of an increased focus on liquidity and transparency

Connecting VIX and Stock Index ETF

As stock market indexes are not tradeable, the importance and trading volume of Exchange Traded Funds (ETFs) cannot be understated. ETFs track and attempt to replicate the performance of a specific index. Numerous studies have demonstrated a strong relationship between the S&P500 Composite Index and the Volatility Index (VIX), but few empirical studies have focused on the relationship between VIX and ETF returns. The purpose of the paper is to investigate whether VIX returns affect ETF returns by using vector autoregressive (VAR) models to determine whether daily VIX returns with different moving average processes affect ETF returns. The ARCH-LM test shows conditional heteroskedasticity in the estimation of ETF returns, so that the diagonal BEKK model is used to accommodate multivariate conditional heteroskedasticity in the VAR estimates of ETF returns. Daily data on ETF returns that follow different stock indexes in the USA and Europe are used in the empirical analysis. The estimates show that daily VIX returns have: (1) significant negative effects on European ETF returns in the short run; (2) stronger significant effects on single market ETF returns than on European ETF returns; and (3) lower impacts on the European ETF returns than on S&P500 returns

Hedging and Cross-hedging ETFs

This paper presents an empirical study of hedging the four largest US index exchange traded funds (ETFs). When hedging each ETF position with its own index futures we find that it is difficult to improve on the naïve 1:1 futures hedge, that hedging is less effective around the time of dividend payments, and that hedged portfolio returns tend to have very large negative skewness and highly significant excess kurtosis. We also investigate the extent to which a long position on one ETF can be offset by a short position on another correlated ETF and consider how best to hedge portfolios of ETFs with one index futures. In these situations minimum variance hedging is clearly preferable to naïve hedging, although it seems to matter little which econometric hedge ratio is used, and the cross-hedged portfolio returns are closer to normality than the futures hedged portfolios. The evaluation focuses on a very large out of sample hedging performance analysis that includes aversion to negative skewness and excess kurtosis as well as effective reduction in variance. Our results should be of interest to hedge funds employing tax arbitrage or leveraged long-short equity strategies. They will also be of interest to ETF market makers since hedging is the most cost effective way of reducing the market risk of inventories, thus hedging enables market makers to reduce bid-ask spreads in a competitive environmentExchange, Traded Fund, Hedging, Minimum Variance, Utility

Connecting VIX and Stock Index ETF

As stock market indexes are not tradeable, the importance and trading volume of Exchange Traded Funds (ETFs) cannot be understated. ETFs track and attempt to replicate the performance of a specific index. Numerous studies have demonstrated a strong relationship between the S&P500 Composite Index and the Volatility Index (VIX), but few empirical studies have focused on the relationship between VIX and ETF returns. The purpose of the paper is to investigate whether VIX returns affect ETF returns by using vector autoregressive (VAR) models to determine whether daily VIX returns with different moving average processes affect ETF returns. The ARCH-LM test shows conditional heteroskedasticity in the estimation of ETF returns, so that the diagonal BEKK model is used to accommodate multivariate conditional heteroskedasticity in the VAR estimates of ETF returns. Daily data on ETF returns that follow different stock indexes in the USA and Europe are used in the empirical analysis. The estimates show that daily VIX returns have: (1) significant negative effects on European ETF returns in the short run; (2) stronger significant effects on single market ETF returns than on European ETF returns; and (3) lower impacts on the European ETF returns than on S&P500 returns