Predictability in Bond ETF Returns

Posted: 5 Jun 2013 Last revised: 3 Oct 2013

See all articles by Jon A. Fulkerson

Jon A. Fulkerson

University of Dayton

Susan D. Jordan

University of Kentucky - Finance

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: June 3, 2013

Abstract

We study the persistence of bond 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 30 days. Premiums and discounts also predict distinct patterns of returns after daily closing. Overnight returns are negative following a high premium, while ETFs with large discounts are followed by positive overnight returns. The large discount ETFs have substantially higher returns than high premium ETFs over the subsequent thirty days. We find that traditional liquidity measures, along with prior deviations from NAV, are significant in explaining a fund’s premiums/discounts. Finally, we examine a long-short portfolio strategy to exploit the observed deviations from NAV, and find it generates an alpha of .96% per month or about 11.5% per year.

Keywords: ETF, NAV, premium, discount

Suggested Citation

Fulkerson, Jon A. and Jordan, Susan D. and Riley, Timothy Brandon, Predictability in Bond ETF Returns (June 3, 2013). Journal of Fixed Income, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2273930 or http://dx.doi.org/10.2139/ssrn.2273930

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Susan D. Jordan

University of Kentucky - Finance ( email )

Gatton College of Business & Economics
University of Kentucky
Lexington, KY 40506-0034
United States
859-257-1626 (Phone)

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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