Exchange Traded Funds and the likelihood of closure

Evgeny Borisovich Tarasov - National Research University "Higher School of Economics". 
 E-mail: etarasov@hse.ru
 Prior to March of 2016, when the first exchange traded fund (ETF) on RTS was introduced, Russian investors’ only option for investing in the domestic index was through a mutual fund. By contrast, the majority world stock exchanges have been giving their clients the option to invest in their leading domestic indexes not only via index mutual funds but also via exchange traded funds (ETF) since decades. Their absence and therefore the lake of familiarity with these funds might be one of the several reasons Russian investors have been willing to pay a premium for ETF investments through intermediaries relative to what they would pay investing directly. Large number of investors buy western ETF via mutual funds. The premiums Russian mutual funds charge for investing in ETFs translate on up to a 36% premium over a 10-year horizon, compared to buying the same ETF directly. This paper introduces to a broader Russian speaking community ETFs, one of the most important financial innovations of the last 20 years, and provides a survey of the research done in this field. This paper reviews the literature on ETFs and provides a brief history of ETFs and these funds’ investment mechanism. In conclusion, some ideas for further research are suggested.The existing paper are divvied in three groups that unite six topics:The first group of literature is devoted to traditional ETF. There are two topics:1. Is the ETF substitute for index mutual funds? If yes, to which level? If it is substitute, why it did not still the index funds?2. Which influence has the introduction of an ETF on the active that it tracks. This topic covers also liquidity, hedge and arbitrage. Second group of papers emerging recently unites the following topics:3. How effective are the ETF tracking the foreign indexes?4. ETF development besides USA. 5. ETF that track not the share indexes. New generation ETF: synthetic, leveraged, actively managed and smart-beta.Third group of papers devoted to the following topic:6. ETF use for optimal portfolio construction.

What Happens After a Fund Family Begins to Offer ETFs?

Exchange-traded Funds (ETFs) have been gaining increasing popularity in the investment community, as evidenced by their high growth both in the number of ETFs created and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this article we examine whether this growing demand for ETFs can be explained through their outperformance as compared with index mutual funds. We consider the population of all ETFs with inception dates before 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had an inception date before 2002. This led to a sample of 230 paired matches for all the styles. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharpe Ratios and risk-adjusted buy and hold total returns for the period 2002–2010. We then applied the Wilcoxon signed rank test to examine whether ETFs had better performances than index mutual funds during the sample period. We conducted the test both within each style and for all the styles put together. In terms of Sharpe Ratio, out of the 12 styles included in the sample, for 5 styles the conclusion was that ETFs outperformed index funds, for 3 of the styles US Broad market, US large cap growth and US Reits index funds outperformed ETFs, and for 4 styles there was statistically no significant difference between ETFs and index fund performances. Out of the 230 paired matches of all the styles, ETFs outperformed index mutual funds 134 times in terms of Sharpe Ratio; however, the test of the hypothesis showed no statistically significant difference between ETFs and index fund performances in terms of Sharpe Ratio. The break-down of the results for risk-adjusted buy and hold total returns was slightly different from those for the Sharpe Ratio, though the overall conclusion was the same. For five of the styles, index funds outperformed ETFs, for three styles ETFs outperformed index funds, and for four styles there was statistically no significant difference between the performances of the two. Out of the 230 paired matches of all the styles put together, ETFs outperformed index mutual funds 125 times in terms of risk-adjusted buy and hold total return; however, the test of hypothesis showed no statistically significant difference between ETFs and index fund performances in terms of risk-adjusted buy and hold total return. These findings indicate that there is statistically no significant difference between ETFs and passive index mutual fund performances at the fund level, and that investors’ choice between the two is related to product characteristics and tax advantages.

A Comparison of Index Funds and ETFs

The value of exchange traded fund (ETF) assets has increased from $66 billion in 2000 to almost a trillion dollars in 2010. We use this massive expansion in ETF assets to study what drives ETF flows. Using a data set of over 500 ETFs from 2001 to 2010, we show that ETF investors chase returns in the same way as mutual fund investors. While there is an active debate about whether return chasing by mutual fund investors represents the pursuit of superior talent, the existence of return chasing in this passively managed environment should not represent a search for skilled managers. We also show that ETF flows increase following high volume, small spreads, and high price/net asset value ratios. Finally, we find little evidence of superior market timing in ETF flows. Our results suggest that return chasing in both mutual funds and ETFs is more likely the result of naïve extrapolation bias on the part of investors that has contributed to the growth of the ETF industry.

Exchange Traded Funds: A New Investment Option for Taxable Investors

The article is devoted to the comparative analysis to forecast models of exchange-traded investment funds dynamics. The exchange traded investment fund was chosen for the study as a modern investment instrument, which managed to combine the best features of stocks and mutual investment funds. However, despite the advantages of this financial instrument, the main task of the investor is the ability to predict its dynamics. To date, there are many forecast models, but the ability to create a reliable and accurate forecast remains extremely important.Two exchange traded funds were selected for forecasting: SPDR S&P 500 ETF TRUST (the stock ticker is SPY) and VanEck Vectors Gold Miners (the stock ticker is GDX). Based on daily prices for the period from January 2016 to January 2020, forecast models of two types were built: linear and nonlinear. Namely, linear models of moving average and exponential smoothing (Holt model) were selected. The neural network model was chosen as a nonlinear model. It turned out that the quality assessment of all models is quite high. However, the constructed forecasts showed that despite the high quality of the obtained statistical models of moving average and exponential smoothing, forecasting with their help is possible only for the forecast horizon, which is one trading day. The neural network model, conversely, shows a worse forecast for the first forecast value, but captures the dynamics and direction of price changes in both the exchange-traded investment fund SPY and GDX. That is, with the help of training, the neural network is able to establish hidden nonlinear patterns of price dynamics. But the horizon of the neural network forecast is also limited: in research it is established that the forecast on the basis of a neural network model it is expedient to build no more than for one exchange week.

ETFs, Illiquid Assets, and Fire Sales

All are Not Created Equal: An Exploration of ETF Asset Growth

The objective of this study is to determine whether the spread in underlying exchange-traded fund (ETF) investments is a significant cause of the premium/discount of the ETF. Spreads of underlying investment portfolios are alternatively calculated using weighted bid-ask and bid-close spreads for a sample of ETFs listed on the Johannesburg Stock Exchange (JSE) in South Africa from 2010 to 2014. Results show that spreads of underlying investment portfolios are positively associated with larger premiums/discounts of ETFs as a whole. However, stratified results show that this relationship exists only for premiums; underlying spreads are not significantly associated with discounts. In addition, the findings show that expense ratios offer a significant explanation for premiums/discounts of ETFs. This paper contributes to the existing literature by offering an explanation for the size of premiums of ETFs at reporting date. Its findings imply that relative illiquidity in the underlying portfolio of the ETF means that a premium will likely persist. A deeper understanding in this regard assists investors in determining whether an ETF premium is worth paying for. In addition, this paper reveals that premiums and discounts of ETFs do not always arise from the same causes and should be investigated as separate phenomena in future research.

We explore the implications of US-based, internationally-focused equity mutual funds holding exchange traded funds (ETFs). We observe significant differences in how ETFs are used by international mutual funds compared to their domestic equity counterparts. Internationally-focused mutual funds use ETFs to alter the return-based and country risk exposures of the mutual fund. In addition to altering the risk of the fund, we find increases in ETF-use coincide with a change in performance, an investment in a greater number of countries, and a reduction the number of direct equity holdings.

ABSTRACTThe home bias phenomenon is a widely investigated puzzle that is still not completely resolved. Home bias is the tendency of investors to invest excessively in domestic assets, in contradiction to the traditional optimal portfolio theories. This research attempts to unveil some of the underlying drivers behind this phenomenon. We examine the relationship between home bias and the level of risk in the portfolio, the percentage of the portfolio invested in ETFs (exchange traded funds), and the investor type (institutional vs. individual). To do so, we use monthly data from the Israeli market from January 2007 to March 2018. This study is the first to investigate the relationship between home bias and the use of ETFs as a global diversification tool. ETFs have become one of the most widespread passive investment instruments for both individual and institutional investors. Our findings show that institutional investors experience less home bias compared to individual investors. Second, an increase in the level of risk in the portfolio causes an increase in home bias. Finally, the use of ETFs has a negative relationship with home bias.

Since the introduction of the first exchange-traded fund (ETF) in the form of Standard & Poor’s Depository Receipts (SPDRs) in 1993, ETFs have become popular investment vehicles in the financial markets. At the end of October 2008, assets under management totaled $460 billion, a reduction of $300 billion since the end of March 2008 in response to the credit crisis. ETFs offer multiple advantages to investors, including easy diversification in the equity, fixed income, and even commodities markets, low cost, tax efficiency, continuous pricing, and low premiums/discounts from the net asset value (NAV) of the underlying assets. However, it is possible for the ETF to exhibit premiums or discounts from the net asset value of the underlying assets due to their structure and dividend treatment. Unlike traditional mutual funds, ETFs can be sold short and purchased on margin. Although the ETF market has shrunk in response to the credit crisis, new innovations in the ETF include active management and retirement ETF products.

An exchange-traded fund (ETF) is a financial asset that tracks a chosen index and trades continuously throughout the day. The price differential between the market price and net asset value (NAV) of the ETF creates risk-free arbitrage opportunities. This article captures the pricing efficiency and price discovery process using autoregressive analysis model and a vector error correction model (VECM). The study concludes that the Indian ETF market displays a lack of price efficiency. Except for two ETFs, the NAV of the ETF has been the lead indicator for ETFs.

Purpose The purpose of this study is to identify the factors that impact the exchange-traded funds net fund flow changes on a daily basis. Design/methodology/approach A total of 1,212 different exchange-traded funds with a proprietary daily net fund flow data and logistic regressions were studied because the majority of the 1,212 exchange-traded funds have mostly zero daily net fund flow changes. Findings It was documented that in the period December 22, 2005 to July 28, 2010 autocorrelation at the daily frequency is not universally present for the 1,212 exchange-traded funds that we study, despite the fact that this is the case in the monthly data documented in prior studies. No support was found for the feedback trading hypothesis but some support was found for the contrarian investor hypothesis on daily basis, even though the opposite is ascertained for both in the prior literature monthly data. Also, it cannot be concluded that tracking error prompts net fund flow changes and thus arbitrage activity. Originality/value The paper contributes to the ongoing analysis of the factors influencing investment companies fund flow changes, which has mostly focused on open-end funds and monthly data so far. Considering the increased scope and relevance of exchange-traded funds in today’s financial markets, this study fills a void in the fund flow changes literature.