Reading Tomorrow's Newspaper: Predictability in ETF Returns
Journal of Index Investing, Forthcoming
23 Pages Posted: 29 Sep 2012 Last revised: 25 Feb 2013
Date Written: September 28, 2012
Abstract: We study the persistence of ETF premiums and discounts. Following a day of high or low premiums or discounts over NAV, ETFs tend to maintain a premium or discount for up to five days, though there is some regression to the mean. Premiums also predict distinct patterns of returns in the following day. Overnight returns following a premium have large drops in prices following a high premium, but significantly high returns the next day. Surprisingly, the NAV returns over the next day also tend to be positive. Discounts show a similar, but opposite pattern with smaller magnitudes. We conclude that ETF premiums and discounts have some ability to predict future returns, including the fundamental returns of the underlying assets.
Keywords: ETFs, daily returns, NAV
JEL Classification: G12, G20
Suggested Citation: Suggested Citation