A really cool paper (and graphic) on ETFs
Zahi Ben-David has an excellent new summary paper on the state of academic research on exchange traded funds with colleagues Rabih Moussawi and Francesco Fanzoni.(1)
The fact Zahi is a thought leader on ETFs and we are in the ETF business is kinda interesting because Zahi and I were definitely not talking about ETFs when we first met nearly 15 years ago! (2)
I love the graphic from the paper that outlines how ETF abritrage works, which also helps investors understand the dynamics of how ETFs trade in the secondary market. See below:
Here is the abstract and a link to the paper if you’d like to dig in:
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.
We’ll be following up with Zahi to get some in-depth answers on his thoughts about the future of the ETF marketplace. Stay tuned!
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)
References [ + ]
|1.||↑||We focused on Zahi for this interview, but Rabih and Francesco have some wonderful research articles at their websites.|
|2.||↑||We entered the finance PhD program at the University of Chicago in 2002. I was a 22 year old with no clue and Zahi had years of experience, a wife, 2 kids, and a successful academic career ahead of him.|