This paper investigates differences in returns between the ETF price, Net Asset Value, and Benchmark Asset Baskets for five popular futures-backed ETFs. We decompose tracking difference to examine the relative size of tracking differences attributable to managers versus the arbitrage process. Tracking differences attributable to managers is found to be significantly smaller than that attributable to the arbitrage process. We then test for average Tracking Differences using the Mincer-Zarnowitz Equation. We find evidence of bias in returns for multiple ETFs and demonstrate the usefulness of the decomposition. Furthermore, we investigate the dynamics of Tracking Error using a GARCH methodology. We find support that the volatility of the ETF effects Tracking Error but find no evidence that rolling futures contracts influences Tracking Error. / Master of Science / This research focuses on futures-backed commodity ETFs. ETFs are exchange-traded instruments and are a convenient way for investors to gain commodity exposure without having to have access to a margin account, deal with futures contract expiration, or the large size of futures contracts. We investigate the ability of these instruments to achieve their investment goals: namely to perfectly replicate the exposure of a benchmark of futures contracts. We find that differences in the returns of the benchmark and ETF exist on average and that the bulk of these differences are attributable to the Creation and Redemption process rather than the ETF manager. Finally, we find that market volatility effects the volatility of these differences, but roll dates have no effect.

In this paper, we test the hypothesis that the introduction of Taiwan Top 50 Tracker Fund (TTT) would impact the market liquidity of its underlying stocks. We address this issue by adopting several volume-based and price-based liquidity measures to present the multi-dimension of liquidity. Our empirical results show that after the introduction of TTT, the standardized trading volume decreases and the market becomes more volatile for the underlying stocks. Both the quoted spread and the effective spread widen in the post-introduction period. These findings suggest deterioration of market liquidity for the underlying stocks. We then further follow Lin et al. (1995) to decompose the effective spread to examine the changes in spread components. We find a significant increase in the adverse selection component in contrast to a slight decline in the order processing cost. Overall, we find evidence that the liquidity of the underlying stocks tends to deteriorate after the introduction of TTT primarily because there is an increase in the cost of informed trading. Our finding is consist with the prediction of Subrahmanyam (1991) where the migration of liquidity traders to the basket securities raises the portion of informed traders in the market of underlying stocks and tends to increase the adverse selection risk and reduce the market liquidity of the underlying stocks.

Active versus passive investing is a popular topic within the investment community and beyond. In particular, many are concerned with fund flows in and out of active and passive investments. Existing research suggests that recent returns are a reason for the capital flow from active to passive and that fees also impact flows negatively. With U.S. equity mutual funds as a proxy for active investing and U.S. equity ETFs as a proxy for passive investing, I show that prior month flows have a positive and significant relationship with current flows for both ETFs and mutual funds, as well as for flows from ETFs to mutual funds. I also show that mutual fund monthly returns have a positive relationship with flows of mutual funds and flows from ETFs to mutual funds, while ETF monthly returns have a negative relationship with flows from ETFs to mutual funds. This supports prior literature. I also find that the differential in mutual fund and ETF returns (rMF – rETF) is insignificant and negative for net fund flows into ETFs. I find a generally positive relationship between mutual fund expense ratios and flows into mutual funds, as well as with flows from ETFs to mutual funds. Finally, I find a negative relationship between ETF expense ratios and flows into ETFs, as well as with flows from ETFs to mutual funds. The relationships between expense ratios and flows mostly contradict prevailing literature, except for the relationship between ETF expense ratios and ETF flows. This suggests passive investors are potentially more price-conscious than active investors, as passive investors experience negative flows as expense ratios increase, while flows into mutual funds do not have that relationship with expense ratios. Higher fees for mutual funds may also suggest a change in the composition of mutual funds, as funds similar to ETFs exit and new mutual funds become even more active.

Exchange traded funds (ETFs) are a relatively recent financial innovation receiving much attention from investors and media due to its low administrative costs. Literature related to ETF performance presents no sizeable records as a result of its brief history.This study contributes to the literature on ETF performance by comparing ETFs to their respective tracking indices as well as to comparable passive unit trusts (PUTs) and active unit trusts (AUTs) after administrative costs. Data used involved ETFs that are derived from securities listed on the Johannesburg Stock Exchange (JSE) that track FTSE/JSE indices. PUTs and AUTs were selected on the basis that they use the same FTSE/JSE indices, as the ETFs, as a benchmark.The results indicate that ETFs have a slightly lower tracking error than PUTs due to lower administrative costs. On average, ETFs and PUTs present statistically insignificant net return differences and it can be inferred that they have very similar return records. Furthermore, ETFs and AUTs, on average, also present statistically insignificant net return differences and it can be inferred that they have very similar return records. / Dissertation (MBA)--University of Pretoria, 2012. / Gordon Institute of Business Science (GIBS) / unrestricted

The thesis investigates if introduction of Exchange Traded Fund, which replicates given index, has impact on liquidity and risk of underlying component securities. This thesis specifically examines impact of introduction ETF called Lyxor ETF WIG20, which was introduced at Warsaw Stock Exchange. ETF holds stock of WIG 20 Index. The impact on liquidity is investigated by using univariate analysis and by using multivariate panel regression, where dummy variable is used. The impact on risk of component stock is analyzed by beta coefficient.

Ample evidence suggests that day-of-the-week patterns exist in US and foreign equity returns. We extend the evidence on the day-of-the-week effect in equity returns by examining the return patterns of iShares for 17 countries and Standard and Poor's Depository Receipts (SPDRs) to establish whether previously observed predictabilities in equity returns are reflected in iShares' returns. We utilize a split sample to examine return patterns and develop trading rules using the initial subsample. We then test those trading rules out of sample. Empirical results reveal that iShares exhibit day-of-the-week return patterns that can be exploited by informed traders.

This thesis investigates the use of commodity exchange traded funds (ETFs) as a price risk management tool for agriculture producers. The effectiveness of ETFs in hedging price risk will be determined by calculating optimal hedge ratios. This thesis will investigate the southeastern producer’s ability to hedge their price risk for corn, soybeans, live cattle and diesel fuel. Hedge ratios will be calculated using ordinary least squares (OLS), error correction model (ECM), and generalized autoregressive conditional heteroscedasticity (GARCH) regression models. A utility maximization framework will be used to determine how transaction costs and risk aversion effect the optimal hedge ratio. The main finding is that ETFs provide producers with a reliable tool when hedging their output and input price risk. The presence of transaction costs decrease the effectiveness of an ETF hedge.

The Exchanged Traded Funds (ETFs) have become a widespread investment vehicle, with unique features that have not been sufficiently studied, especially when it comes to emerging markets ETFs. In addition, consolidated pricing models are not enough to analyze the dynamics of a type of fund that adds a new dimension to a traditional investment funds: a change in the price of shares traded on the stock exchange. Thus, ETFs have shares priced by supply and demand, that may present considerable discrepancies in relation to its book value, called Net Asset Value (NAV). The difference between the price of the share and its book value (or their returns) is called pricing deviation by the emerging literature on the theme, although there are discrepancies about its name and concept. Some studies such as Berk and Stanton (2007) point out that the share returns can be partly explained by its own persistence. There are indications also that it would be related to an exaggerated reaction of the market, as verified by Levy and Lieberman (2013) and Milani and Ceretta (2014b). To contribute to the limited literature on the subject, this study aimed to verify how the variables of traditional models of investment fund pricing explain the Brazilian ETFs returns and which are the characteristics of the local correlation of its price deviation with the return market. After estimating the traditional pricing models, it was found that the return of the ETF is explained by the co-variance and co-kurtosis coefficients and the SMB factor. Still, the relationship between the return of their shares and its book value variation was observed, showing that the market return itself affects the price variation. Among the various contributions, it was found that extreme market returns affect the return of the ETF to a greater extent; negative market returns are more influent than positive returns; there is a tendency that investors allocate funds in ETFs already overstated; a specific ETF showed superior performance to others through greater exposure to systematic risk in times of elevation than in the fall, and possibly taking advantage of economy of scale. The results contribute to the formation of the young literature on the Brazilian ETFs, generating new questions that can be leveraged in future research. / Os Exchanged Traded Funds (ETFs) se tornaram um veículo de investimentos amplamente difundido, com características únicas que não foram ainda suficientemente estudadas, especialmente quando se trata de ETFs de mercados emergentes. Além disso, modelos de precificação consolidados não são suficientes para analisar a dinâmica de um tipo de fundo que adiciona uma nova dimensão em relação aos fundos de investimento tradicionais: a variação do preço das quotas, negociadas em bolsa de valores. Assim, os ETFs apresentam cotas precificadas pela oferta e demanda, podendo apresentar consideráveis discrepâncias em relação ao seu valor patrimonial, denominado Net Asset Value (NAV). A diferença entre o preço da quota e seu valor patrimonial (ou seus retornos) é denominada pela emergente literatura acerca do tema de desvio de preço, embora ainda existam discrepâncias acerca da sua denominação e conceituação. Alguns estudos como o de Berk e Stanton (2007) apontam que os retornos das cotas podem ser explicados parcialmente por sua própria persistência. Há indícios também que estariam relacionados com uma reação exagerada do mercado, como verificado por Levy e Lieberman (2013) e Milani e Ceretta (2014b). Visando contribuir com a restrita literatura acerca do tema, este trabalho teve como objetivo geral verificar como as variáveis de modelos tradicionais de precificação de fundos de investimento explicam os retornos de ETFs brasileiros e quais as características da correlação local de seu desvio do preço com o retorno do mercado. Após a estimação dos tradicionais modelos de precificação, verificou-se que o retorno dos ETFs é explicado pelos coeficientes de co-variância, co-curtose e pelo fator SMB. Ainda, foi verificada a relação entre o retorno de suas quotas e a variação de seu valor patrimonial, revelando que o próprio retorno do mercado afeta o desvio de preço. Entre as diversas contribuições, verificou-se que retornos extremos do mercado afetam o retorno dos ETFs em maior proporção; retornos negativos influenciam mais os ETFs do que retornos positivos; há tendência de que os investidores aloquem recursos em ETFs já superavaliados; um ETF específico apresentou performance superior aos demais através de uma exposição maior ao risco sistemático nos momentos de elevação do que nos de queda, além de possivelmente usufruir de ganhos de escala. Os resultados contribuem para a formação da jovem literatura acerca dos ETFs brasileiros, gerando novos questionamentos que poderão ser aproveitados em pesquisas futuras.

Thesis advisor: Jeffrey Pontiff / The first essay of this dissertation studies the effect of Exchange Traded Funds (ETFs) on the yields and liquidity of the underlying corporate bonds. I find that ETFs lower the yield, have an insignificant or negative impact on the liquidity, and decrease the retail volume of constituent bonds. Overall, these results support theoretical predications that basket securities entice liquidity traders to exit the underlying market. The second essay analyzes the role of ETFs in mutual fund families and is joint work with Harold Spilker. We study mutual fund and ETF twins - index funds from the same family that follow the same benchmark. Mutual fund twins are shown to have lower tax burdens, long-term capital gains yields, and unrealized capital gains. Conversely, ETF twins have higher long-term yields and unrealized capital gains, but are compensated with lower expense ratios. Fund families benefit because twin offerings generate higher flows than their non-twin peers. These results support previous research that mutual fund families use diversification and subsidization to benefit the overall family. The third essay provides academics with a detailed understanding of the history, structure, regulation, and prospects of ETFs. The essay documents that the growth of index investing can largely be attributed to ETFs. The information and nuances discussed provide a baseline for developing future research questions and data. / Thesis (PhD) — Boston College, 2015. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Generally, investment in commodity ETFs cannot produce similar performance as well as spot goods. Evidence shows that ¡§rolling¡¨ futures positions experience ¡§contango and the effects on contango will harm ETFs¡¨ value. This study shows that two ETFs, USO and UNG, underperform the spot substantially because of rolling in the crude oil and natural gas market, respectively. In this study we employ four energy sector futures market data from the Thomson Reuters to investigate the impact of rolling positions on the relation between commodity index funds and in contango/backwardation. This paper finds that increasing trading in commodity index fund made futures market more contango in the WTI crude oil, natural gas and heating oil markets. This study termed the strategy as the Backwardation Sensitive Trading (BST) . Moreover, this research designs an investment strategy based on variation of backwardation. That is to examine whether BST can make a successful arbitrage: increase holding when the market is more contango and decrease holding when the market is more backwardation. Our strategy performs better than USO and UNG, and those performances perform lower tracking error on oil and natural gas over 2006 to 2010.