ETFs, Anomalies and Market Efficiency

Abstract

We construct a stock-level composite mispricing score CZ Net based on over 200 anomalies. We find that a long-short CZ Net portfolio formed by low ETF ownership stocks yields higher returns, greater Sharpe ratios, and more significant alphas compared to the portfolio formed by high ETF ownership stocks. Furthermore, low ETF ownership stocks exhibit greater price delay and lower information efficiency. These findings remain robust after controlling for characteristics related to short-sale constraints, arbitrage costs, and the information environment. Using Russell index reconstitution as a natural experiment, we provide additional causal evidence of ETF ownership attenuating anomaly profits.

Keywords: ETFs, ETF ownership, Anomalies, Market Efficiency

JEL Classification: G11, G12, G14, G23