Trading on ETF mispricings

Abstract

Purpose Prior literature has shown deviations between ETF prices and their net-asset-value (NAV) to exist. Fulkerson and Jordan (2013, p. 31) question “if there exists a true tradeable strategy” to exploit these inefficiencies. The purpose of this paper is to implement a profitable daily long-short trading strategy based on price/NAV information and explicitly accounting for trading costs. Design/methodology/approach For a sample of European sector ETFs, the authors analyze gross and net returns of a long-short trading strategy in the capital asset pricing model and Fama-French three-factor model. Findings The authors document positive gross excess return for the long-short trading strategy in all sample periods, but net excess returns to be positive only between 2008 and 2010. Research limitations/implications The results document a profitable long-short trading strategy exploiting deviations between ETF prices and NAV and highlight the impact of trading costs in ETF markets. Due to the limited availability of historic trading cost data, the research uses a comparatively small sample size. Practical implications The net profitability of long-short trading in ETFs is only found in times of high uncertainty in the stock market. Originality/value The inclusion of trading costs enables a detailed comparison between gross and net returns in ETF trading, addressing potential limits to arbitrage.

(In)Efficiencies in Latin American ETFs

“…In general, results in Figure 3 show that implementing this longshort trading strategy is profitable and that a diversified, strategic investment in Latin American ETFs may lead to significant positive returns 6 . 5 This is in contrast to previous results for the European market as documented by Kreis and Licht (2016). 6 We are omitting trading costs in this analysis.…”

“…Previous analyses in other ETF markets (see e.g. Kreis and Licht, 2016) have shown the bid-ask spread to have a non-negligible impact on ETF trading. Unfortunately, we do not have this information available to us in a sufficient frequency.…”

“…6 We are omitting trading costs in this analysis. For a detailed analysis of the impact of trading costs, we refer to Kreis and Licht (2016 …”