Inefficiencies in the Pricing of Exchange-Traded Funds

48 Pages Posted: 21 Mar 2010 Last revised: 27 Jul 2016

Antti Petajisto

New York University (NYU) - Department of Finance; Yale School of Management; BlackRock, Inc

Date Written: July 22, 2016

Abstract

The prices of exchange-traded funds can deviate significantly from their net asset values, on average fluctuating within a band of about 200 basis points, in spite of the arbitrage mechanism that allows authorized participants to create and redeem shares for the underlying portfolios. The deviations are larger in funds holding international or illiquid securities where net asset values are most difficult to determine in real time. To control for stale pricing of the underlying assets, I introduce a novel approach using the cross-section of prices on a group of similar ETFs. Nevertheless, the average pricing band remains economically significant at about 100 basis points, with even larger mispricings in some asset classes. Active trading strategies exploiting such inefficiencies produce substantial abnormal returns before transaction costs, providing further proof of short-term mean-reversion in ETF prices.

Keywords: ETF, mispricing, arbitrage, NAV

JEL Classification: G10, G12, G14, G20, G23

Suggested Citation

Petajisto, Antti, Inefficiencies in the Pricing of Exchange-Traded Funds (July 22, 2016). Available at SSRN: https://ssrn.com/abstract=2000336 or http://dx.doi.org/10.2139/ssrn.1572907

Antti Petajisto (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0378 (Phone)

HOME PAGE: http://www.petajisto.net/

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://www.petajisto.net/

BlackRock, Inc ( email )

400 Howard St
San Francisco, CA 94105
United States
415-670-7911 (Phone)

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