ETF Primary Market Structure and Its Efficiency

68 Pages Posted: 10 Jul 2022

See all articles by Ewelina Zurowska

Ewelina Zurowska

University of Pennsylvania - The Wharton School

Date Written: Jan 01, 2022


The primary market of many US registered ETFs exhibits an oligopolistic structure, which is shown to have relevant implications for the pricing efficiency of those financial products. I show that the entry of an additional Authorized Participant (AP) corresponds to a decrease in the magnitude of ETF price deviations from Net Asset Value (NAV) of at least one basis point in ETFs with high primary market concentration. I build a dynamic equilibrium model of ETF primary market arbitrage that describes the trade-off faced by monopolistically competitive APs between waiting for mispricing to widen and pre-empting competitors from eliminating it. In the model, the creation unit size is shown to be an important friction driving the entry decision and, therefore, the magnitude of mispricing. Indeed, in the data, around one-third of all primary market transactions amount to one creation unit, suggesting that it is often a binding constraint. ETF split events and the creation unit size changes help to identify shocks to the dollar value of creation unit size empirically. I show that by cutting the creation unit size in half, mispricing decreases by almost two basis points, a magnitude consistent with that implied by my quantitative model.

Keywords: ETF, primary market, authorized participants, arbitrage, NAV, mispricing, creation unit

JEL Classification: G14, G21, G23

Suggested Citation

Zurowska, Ewelina, ETF Primary Market Structure and Its Efficiency (Jan 01, 2022). Available at SSRN: or

Ewelina Zurowska (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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