Exposition of Evidence for Idiosyncratic versus Induced Seasonality in ETF Performance

Alves, C. & Reis, D. (2020) Exposition of Evidence for Idiosyncratic versus Induced Seasonality in ETF Performance, Applied Economics Letters, Vol. 27, No. 1, 14-18. DOI: 10.1080/13504851.2019.1606397

Posted: 29 Dec 2020

See all articles by Carlos F. Alves

Carlos F. Alves

University of Porto - Faculty of Economics

Date Written: April 22, 2019

Abstract

An exchange-traded fund (ETF) is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. Therefore, returns of ETFs that track a benchmark index portfolio should mimic the returns of their benchmark indexes. If a benchmark index’s performance exhibits a seasonal pattern, then the performance of its associated ETF should replicate that pattern. This type of ETF performance seasonality is induced by trends in the market of securities in the benchmark index portfolio. Any other seasonality can be considered to be idiosyncratic. Based on a sample of 148 ETFs listed in NYSE Arca, this article provides evidence of a half-year effect (higher performance in the first half-year), a quarter effect (outperformance of the second quarter and underperformance of the fourth quarter), and month within the quarter effect (higher and lower performance in the first and third months of each quarter, respectively). Additionally, superior and inferior performance were observed in April and December, respectively.These seasonal patterns are not visible on benchmark indexes, with the exception of the unusually positive performance in April, which can be considered induced seasonality. The other effects, which cannot be attributed to underlying markets, are evidence of idiosyncratic seasonality.

Keywords: Indices seasonality, tracking error, ETFs, performance seasonality

JEL Classification: G11, G12, G20

Suggested Citation

Alves, Carlos Francisco Ferreira, Exposition of Evidence for Idiosyncratic versus Induced Seasonality in ETF Performance (April 22, 2019). Alves, C. & Reis, D. (2020) Exposition of Evidence for Idiosyncratic versus Induced Seasonality in ETF Performance, Applied Economics Letters, Vol. 27, No. 1, 14-18. DOI: 10.1080/13504851.2019.1606397, Available at SSRN: https://ssrn.com/abstract=3731390

Carlos Francisco Ferreira Alves (Contact Author)

University of Porto - Faculty of Economics ( email )

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