Exchange-Traded Funds: Issues and Studies

This study investigates the pricing efficiency of the Shanghai 50 ETF (SSE 50 ETF), the first exchange-traded fund (ETF) in China. The empirical results demonstrate that ETF market prices and net asset values (NAV) are cointegrated and there is unidirectional causality from price to NAV. The conditional variance dynamics from the augmented Generated AutoRegressive Conditional Heteroskedasticity (GARCH) framework show that ETF market prices influence NAV volatility and therefore can be used as price-discovery vehicles. The study also finds that the fund's prices did not closely follow the NAV during the second half of 2007, when the Chinese stock market experienced substantial volatility, reflecting sudden increased market risks as well as potential arbitrage opportunities during financial turbulences.

The bid–ask spread alone does not tell the true cost of trading an exchange-traded fund (ETF). The market prices on most ETFs frequently deviate from their net asset value (NAV) because of fluctuations in market demand and supply. An investor needs to measure the true cost of an ETF trade as the difference between the fund9s current transaction price and its NAV at that point in time. Author James Angel , from Georgetown University , discusses his article, ETF Transaction Costs Are Often Higher Than Investors Realize , published in The Journal of Portfolio Management ’s Spring 2016 issue. In this article, Angel and co-authors Todd Broms of Broms Asset Management and Gary Gastineau of ETF Consultants.com offer their analysis of how and why ETF market prices deviate from their NAVs.

Exchange-traded funds (ETFs) are the most popular products in the financial sector today. There is extensive literature on the multifractal analysis of some stock markets, but not about the multifractal behaviour of the ETF market. This study examines the efficiency of stock index ETFs worldwide from an Efficient Market Hypothesis (EMH) perspective, using the ETFs: Ishares Msci World ETF (URTH), Ishares Russell 1000 ETF (IWB), SPDR S&P 500 ETF TRUST (SPY), Ishares Global Clean En. ETF (ICLN), Ishares USD Green Bond ETF (BGRN), from 1 January 2021 to 24 May 2024. It analyses a pre-conflict and a geopolitical conflict to uncover distinct patterns of behaviour reflecting significant changes in market conditions. Before the conflict, the Ishares MSCI World, Ishares Russell 1000, SPDR S&P 500 and Ishares USD Green Bond ETFs showed signs of anti-persistence in returns, indicating a lack of strong relationship or predictability between short-term price movements. The Ishares Global Clean Energy ETF did not reject the random walk hypothesis, suggesting that returns follow a pattern closer to random, where market prices already efficiently reflect all available information. During the conflict, there was a transition in the ETFs' behaviour patterns, as evidenced by the increases in slope values for Ishares MSCI World, Ishares Russell 1000, SPDR S&P 500, Ishares Global Clean Energy and Ishares USD Green Bond. Thus, the possible transition from anti-persistence to long-term memories in ETF returns during the conflict. For portfolio managers, these findings highlight the need to continually adapt investment strategies to manage risks better and take advantage of opportunities in a dynamic and complex investment environment.

Exchange-traded funds (ETFs) trade at a market-determined price, which should be equal to their Net Asset Value (NAV) based on the law of one price. This study examines whether a long-run equilibrium relationship between the price and NAV exists for four South African-listed ETFs using Johansen’s cointegration. A common stochastic trend is found between the price and NAV for all the funds; however, this relationship only conforms to the law of one price for three of the four funds. Both the price and NAV are found to correct for the disequilibrium in the long-run relationship which is surprising as if the arbitrage process of creating and deleting units associated with ETFs was the predominant driver of the equilibrium relationship as theory suggests, then it would be expected that only the price would adjust to correct for any disequilibrium. The profile persistence analysis confirms that the deviations from the NAV do not persist. The findings of this study thus suggest that the market for ETFs in South Africa is reasonably efficient and hence retail investors are not likely to be exposed to substantial mispricing which could adversely affect their returns from holding ETFs. DOI: 10.5901/mjss.2014.v5n3p183

Since the inception of the first ETF - a broad-based domestic equity fund tracking the S&P 500 in 1993, Exchange Traded Funds (ETFs) have grown in acceptance and coverage. This paper examines the performance of REIT ETFs in terms of tracking the respective benchmarks and the effect of including REIT ETFs in a mixed asset portfolio. Our research shows that classical ETFs have high correlations with the NAREIT index and tend to provide better tracking while non-classical ETFs have higher tracking errors and deviation from net asset values. We also find that the allocation to REIT ETFs is significant when constructing efficient portfolios.

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.

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.

ETFs, Illiquid Assets, and Fire Sales

Exchange-Traded Funds as an Alternative Investment Option: A Case Study

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.

The authors examine an optimized Markowitz efficient portfolio by applying a quantitative trading strategy to the S&amp;P 500 sector exchanged-traded funds (ETFs). First, they implement a pattern-matching trading system, which extracts the underlying trends based on dynamic time warping. They then estimate a decision-making dictionary from the windows of ETF prices to identify the entry points for trading. Finally, they construct a Markowitz efficient portfolio on the ETFs’ net asset values on the validation set. The results demonstrate that the strategy can be modified to improve performance. <b>TOPICS:</b>Exchange-traded funds and applications, portfolio construction, statistical methods <b>Key Findings</b> ▪ The authors explore the applicability of dynamic time warping to financial time series in the context of quantitative trading strategies. ▪ They construct a portfolio that minimizes the expected volatility by estimating the optimal weights for each component to explore profitable quantitative strategies. ▪ They demonstrate the flexibility of the pattern-matching trading strategy by modifying the strategies to adapt to both the pre–COVID-19 period and the post–COVID-19 period.

Exchange Traded Funds: A New Investment Option for Taxable Investors

What Happens After a Fund Family Begins to Offer ETFs?

Purpose: The objective of this study is to empirically confirm the existence of a premium to the price of bonds with the ‘green’ status in accordance with climate standards. It differs from previous ones in that it is based on the analysis of green bond exchange-traded funds. Need for the study: Currently, there is an accelerated development of the green bond market and an increase in their importance in solving the problem of financing environmental projects. At the same time, in the academic literature, the existence of a ‘green’ premium is not such an unambiguous issue, and the scope of relevant research should be expanded. Methodology: The chapter analyses the efficiency of investing in green Exchange Traded Funds (ETFs) compared to conventional ETFs using two approaches. The first approach uses various indicators of green bond funds’ returns based on the Capital Asset Pricing Model (CAPM) model: Sharpe ratio, risk-adjusted Modigliani–Modigliani ratio, coefficient beta, coefficient Jensen's alpha and value at risk. The second approach is compares the ratio of the current price to the fund's net asset value (NAV). Findings: The study found evidence of a special premium in green bond funds. Practical implications: The continued growth of the green bond market confirms the considerable potential of this financial instrument. Understanding the fundamental factors driving the growth of green bond market is critical to the global sustainability investment agenda as well as the feasibility study of issuing such securities, undergoing additional certification stages, and the costs required to obtain the appropriate label.

A Comparison of Index Funds and ETFs