When Passive Funds Affect Prices: Evidence from Volatility and Commodity ETFs
Review of Finance, forthcoming https://doi.org/10.1093/rof/rfad038
64 Pages Posted: 24 Jan 2020 Last revised: 12 Nov 2023
Date Written: November 14, 2019
This paper studies ETF price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing, calendar rebalancing, and flow rebalancing, and show that trading against ETFs is risky. Leverage rebalancing has the largest effects on the ETF-related price component. This rebalancing amplifies price changes and exposes ETF counterparties to variance.
Keywords: ETF, leverage, commoditization, VIX, futures
JEL Classification: G11, G13, G23
Suggested Citation: Suggested Citation