Predictability in Bond ETF Returns
Posted: 5 Jun 2013 Last revised: 3 Oct 2013
Date Written: June 3, 2013
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: Suggested Citation