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

See all articles by Karamfil Todorov

Karamfil Todorov

Bank for International Settlements

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

Todorov, Karamfil, When Passive Funds Affect Prices: Evidence from Volatility and Commodity ETFs (November 14, 2019). Review of Finance, forthcoming https://doi.org/10.1093/rof/rfad038, Available at SSRN: https://ssrn.com/abstract=3504016 or http://dx.doi.org/10.2139/ssrn.3504016

Karamfil Todorov (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

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