Exchange Traded Funds: History, Trading and Research

We survey the litterature devoted to Exchange Traded Fundsliterature review, Exchange Traded Funds

PRICING EXCHANGE TRADED FUNDS

Exchange Traded Funds are equity issues of companies whose assets consist entirely of cash and shares of stock approximating particular indexes. These companies resemble closed end funds except for the unique feature that additional shares can be created or redeemed by a number of registered entities. This paper investigates the extent and properties of the resulting premiums and discounts of ETFs from their fair market value. Measured premiums and discounts can be misleading because the net asset value of the portfolio is not accurately represented or because the price of the fund is not accurately recorded. These features are incorporated into a model with errors-in-variables that accounts for these effects and measures the standard deviation of the remaining pricing errors. Time variation in this standard deviation is investigated. Both domestic and international ETFs are examined, each from an end-of-day perspective and from a minute-by-minute intra-daily framework. The overall finding is that the premiums/discounts for the domestic ETFs are generally small and highly transient, once mismatches in timing are accounted for. Large premiums typically last only several minutes. The standard deviation of the premiums/discount is 15 basis points on average across all ETFs, which is substantially smaller than the bid-ask spread. For international ETFs, the findings are not so dramatic. Premiums and discounts are much larger and more persistent, frequently lasting several days. The spreads are also much wider and are comparable to the standard deviation of the premiums. This finding is insensitive to the timing of overlap with the foreign market, the use of futures data, or different levels of time scale. In fact there are only a small number of trades and quote changes in a typical day for most of these funds. An explanation for this difference may rest with the higher cost of creation and redemption for the international products. Nevertheless, when compared with closed end funds where there are no opportunities for creation or redemption, the ETFs have smaller and less persistent premiums and discounts. The implication is that the pricing of ETFs is highly efficient for the domestic products and somewhat less precise for the international funds since they face more complex financial transactions and risks

Risk and expected returns of private equity investments : evidence based on market prices

We estimate the risk and expected returns of private equity investments based on the market prices of exchange traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of about one to two percent. We also find that the market expects listed private equity funds to earn zero to marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively correlated with GDP growth and negatively correlated with the credit spread. Finally, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds

A brief overview of the types of ETFs

 Exchange-traded fund is a type of exchange-traded product. ETF is a fund that is traded as a typical financial asset. Just like an index fund, ETF represents a basket of assets that reflect popular stock index. ETF traded just like any other company on the stock exchange. By owning ETF investor receives two important advantages – the diversification of index fund plus the flexibility of trading financial assets. There are different types of ETFs. Mainly divided into index, commodity, bond, currency, exchange-traded trusts and leveraged exchange-traded funds. The article discusses the basics of exchange-traded fund, does a brief history review on the emergence of exchange-traded funds, and provides information on the basic and specific types of exchange-traded funds.The used scientific tools include:study of scientific literature;study the performance of different markets which operate with exchange-traded funds;meaningful analysis and summary of theoretical and practical applied information. 

An empirical analysis of passively managed exchange traded funds and mutual funds: the analysis of index replicating funds from North America, Europe and the world

Objectives The main objectives of this study were to discover, whether exchange traded funds differ from mutual funds for which both employ passive replication strategies and to examine if mutual funds have incurred a decrease in monthly cash flows due to the emergence of exchange traded funds. Summary Exchange traded funds and mutual funds are similar investment vehicles. Due to the existence of passively managed funds of both types, the question arises, whether they provide similar returns with similar risk. The literature explains the differences of both fund types and finally the empirical analysis aims to discover whether there are significant differences in what they provide. Additionally, due to the proliferation of exchange traded funds all over the developed capital markets, one would think that due to their similarity with mutual funds, they would eventually replace them. Conclusions No statistical evidence of any differences in exchange traded fund and mutual fund returns, risk, risk-adjusted returns or index tracking. Mutual funds have not incurred lower cash flows on a cumulative basis. Exchange traded funds and mutual funds can possibly coexist because both have their own users depending on the investment horizon, tax structure or the monetary situation of the investor among other factors

Momentum in smart beta exchange-traded funds

Momentum is one of the most puzzling pricing anomalies discussed in the academic literature as past returns should not predict future returns under the efficient market theory. Asset pricing models have failed to explain momentum returns across different markets and asset classes while academics have argued about the reasons behind the success of momentum strategies. Momentum is stronger among industries and many papers have studied industry momentum in exchange-traded funds. More recent evidence suggests that industry and individual stock momentums originate from factor momentum. This thesis aims to extend factor momentum into the universe of exchange-traded funds by implementing relative-strength and time-series momentum strategies in 24 smart beta exchange-traded funds traded on the U.S. over the sample period of August 2000 to February 2020. Implementation of momentum strategies generates substantially large transaction costs due to the high trading volume required by the strategies. Smart beta exchange-traded funds offer investors easier access to factor momentum strategies with lower transaction costs. Thus, the purpose of this thesis is to examine whether individual investors can gain similar abnormal factor momentum returns documented in earlier studies by exploiting momentum strategies in smart beta exchange-traded funds. This thesis contributes to the earlier momentum studies in exchange-traded funds with a longer sample period that provides further evidence over the post-crisis period of the recent financial crisis. Three regressions of the Fama-French three, five, and six-factor models are used to test the profitability of the momentum strategies. Contrary to the results of factor momentum documented in earlier studies, the results from the regression models show that all abnormal returns are either negative or statistically insignificant. Furthermore, the results show that exchange-traded fund momentum strategies remain unprofitable with a longer post-crisis sample period. The thesis concludes that momentum strategies in smart beta exchange-traded funds are unprofitable and investors are not able to achieve abnormal returns by exploiting these strategies. The differing results with the earlier factor momentum studies might emerge from the simplistic factor approach used by the smart beta exchange-traded funds that could lead to unintended factor exposures. The exchange-traded fund market might also be more efficient than the stock markets. Another explanation for the failure of momentum in exchange-traded funds could be the small spreads between the past winners and losers. Future research could try to explain the reasons behind the reported momentum discrepancies between exchange-traded funds and individual stocks

Gold vs Gold Exchange Traded Funds: An Empirical Study in India

This study aim of this is to estimate the relationship between gold and Gold Exchange Traded Fund (ETF) and the performance of Gold ETFs in India by using various statistical models. The data for the study covers a period of three years from 2015 to 2018. The data was collected from the National Stock Exchange database and other sources. The outcome of this study was to find out whether there is a relationship between gold and Gold ETFs. It was found out that Gold ETFs has more returns than the physical gold; Axis ETF performed the best among those Gold ETFs selected for the study. This study will be beneficial for the market researchers and investors who find the best opportunities in the Gold ETFs

Essays on exchange-traded funds

This thesis investigates the consequences of exchange-traded fund industry growth. In particular, I study the ETF arbitrage mechanism, the impact of ETF trading on international diversification and on price efficiency of distressed stocks. In the first chapter, I show that, although low on average, ETF premiums/ discounts can be as high as 16% when considering international country-level ETFs. I propose a risk-based limits to arbitrage explanation of such deviations. I show that while currency and equity illiquidity risks are important in explaining ETF premiums there is still a large portion of premium that remains unexplained. I argue that ETF premiums represent a reward arbitrageurs demand for being exposed to financial frictions risk and show that the absolute value of ETF deviations is a good proxy for multiple dimensions of financial frictions such as funding illiquidity, credit risk and information uncertainty. I show that it can be used as an aggregate financial friction proxy at the country-level and that it is priced in the cross-section of stock returns internationally. In the second chapter, I show that investment decisions of ETF market participants when trading country ETFs are driven by shocks to U.S. fundamentals, rather than local risks. Investors react only to negative news about local economies. When U.S. economic uncertainty increases, investors switch to Cash ETFs. I demonstrate that ETF arbitrage mechanism is one of the key channels through which U.S. shocks propagate to local economies leading to increased return correlation with the U.S. market, limiting the benefits from international diversification. I find that countries with stronger ETF price discovery and lower limits to arbitrage have a higher comovement with the U.S. market. In the third chapter, I examine the effect of exchange traded funds on the underlying stocks conditional on the credit quality of securities in the basket. I show that U.S. industry ETFs help to alleviate the short-selling constraint present for distressed securities at the individual stock level by providing the alternative trading route to gain the negative exposure via cheap short-selling of ETFs. As a result, ETF basket membership has a positive effect on distressed stocks price efficiency. In addition, I show that distressed stocks that are members of ETF basket do not show signs of distress anomaly unlike the non-member securities