How Passive are International ETFs? A Study of Their Intraday Behaviour

Abstract

I find that during the trading day in New York, the international equity ETFs whose underlying markets are closed behave very much like large-cap U.S. stocks, in that their intraday returns and volatility can be explained by the S&P500 to a large extent. The evidence that international ETFs are forward looking supports the previous findings that international equity ETFs trade at larger premiums/discounts compared to their U.S. equity counterparts. This happens when the ETFs are not just passive index tracking funds, but rather they anticipate how their underlying markets will react to movements in the U.S. market when they re-open, causing their overnight net asset values (NAV) to quickly become stale. This result is reinforced by additional evidence that the ETFs have a larger beta with the S&P500 than with their underlying country index. Finally, I document the impact that the financial crisis had on these ETFs' intraday trading patterns.