Exchange Traded Funds (ETFs) (original) (raw)
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The performance and trading characteristics of exchange-traded funds
This study examines the performance and trading characteristics of exchange-traded funds (ETFs) in Australia. We investigate the ability of index oriented (classical) ETFs to track underlying equity benchmarks on the Australian Stock Exchange, and provide a comparison of the tracking error volatility between these types of market-traded instruments and equity index funds operated off-market. Our study finds that while index-oriented ETFs closely track their respective benchmarks, these instruments have not been embraced to the same extent as in overseas markets, and relative to off-market index managed funds. Our research provides an important comparison of classical ETFs between Australia and the United States.
Future business journal, 2024
Passive investments such as exchange-traded funds (ETFs) provide an opportunity to invest in indexes, asset classes, and sectors with low maintenance costs and high transparency. Today ETFs dominate the world, with nearly 50% of the investment in the USA coming through ETFs. Numerous studies on specific aspects on ETFs have been done earlier; however, considering the scarcity of thorough summaries in the existing body of literature, this bibliometric and systematic review aims to adopt a methodical approach with the goal of delivering qualitative and quantitative understanding of ETFs, while highlighting general research trends. The authors analyzed 2058 articles associated with ETFs from the Scopus database during the last 50 years, i.e., from 1973 till date. The search was initially conducted using title, keyword, and abstract, yielding 2058 articles, which were narrowed to only include research papers and review papers, resulting in a final count of 958 items. The most important authors, highest cited articles, prominent journals, important themes, and associated countries have been identified using bibliometric research. The numerical and visual representations of the analysis show that ETFs are a widely studied research area, and the enormous rise in publications in 2020, 2021, and 2022 demonstrates that researchers are quite interested in the topic. According to affiliation statistics, most research is focused in the USA together with other developed nations, opening new options for the research on ETFs in relation to developing economies. The current analysis reconciles numerous exchange-traded fund studies associated with volatility, liquidity, risk-return trade-off, and tracking errors and identifies possible research gaps. Some of the emerging topics that evolved in passive investments include the use of machine learning, AI, and the emergence of ETFs associated with ESG and sustainability. This research will help lawmakers, scholars, and regulators understand the core principles of ETFs and identify areas that deserve additional investigation.
Two Essays on the Information Embedded in Flow of Exchange-Traded Funds (ETFs)
2021
An exchange-traded fund (ETF) is a pooled investment vehicle with shares similar to common equities, and it can be bought or sold on the stock exchanges. As more money flow into an ETF, its assets increase as do the number of shares outstanding. The demand for ETFs, especially after the 2008 crisis, has grown remarkably in the United States. Features such as intraday tradability, tax efficiency, low fees, and transparency have contributed to the ETFs' appeal to investors. According to Bloomberg terminal data, as of January 2021, there were 2584 U.S.-registered ETFs, with over $5.5 trillion assets under management. Recent studies have stressed the role of passive investing and its importance in the financial markets. Several lines of evidence in recent studies suggest that institutions play a role in nonfundamental demand shocks on their underlying securities (Ben‐David et al., 2018; Coval & Stafford, 2007; Etula, Rinne, Suominen, & Vaittinen, 2020; Lachance, 2020; D. Lou, 2012)....
The effect of ETFs on financial markets: a literature review
Financial Markets and Portfolio Management, 2020
Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs, are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review provides a broad overview of recent academic studies analyzing the effect of ETFs on liquidity, price discovery, volatility, and comovement of the underlying securities.
The effect of ETFs on financial markets
2019
Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review gives the reader a broad overview of recent academic studies analysing the effect of ETFs on liquidity, price discovery, volatility and comovement of the underlying securities.
Economics and Finance, 2025
his article explores the transformative impact of Exchange-Traded Funds (ETFs) on modern investment strategies, emphasizing their role in democratizing diversification. ETFs are presented as versatile financial instruments that enable both professional and individual investors to access diversified portfolios at relatively low costs. The paper discusses the mechanics of ETF creation, trading, and redemption, along with their advantages, including transparency, liquidity, and cost efficiency. It also addresses potential drawbacks, such as liquidity challenges, tracking errors, and systemic market risks. The evolving role of ETFs in financial markets is contextualized with technological advancements like artificial intelligence and machine learning, which enhance portfolio management capabilities. Additionally, the article examines the implications of passive investing on market efficiency, stock liquidity, and active management, offering a balanced perspective on the future of ETFs in portfolio management.
Performance and Trading Characteristics of Exchange Traded Funds: Developed vs Emerging Markets
2015
Exchange Traded Funds (ETFs) are one of the most successful financial innovations of the last decades. The main focus of this study is to examine the risk adjusted performance, tracking error and trading characteristics of emerging and developed markets ETF. 43 passively managed equity ETFs have been chosen to cover both markets. The results indicate that the emerging markets are less efficient in terms of index replication and possess higher tracking error compared to the developed market ETF. Conversely, emerging markets provide better risk adjusted performance. Last but not least, it is also found that assets size has positive impacts towards ETFs performance and in contrast, the expense ratio has a negative impact on ETFs performance. To determine the policy matters, investment types and strategy for the two different types of capital market products, this study is quite relevant to the individual investor, institutional investors, policy makers and the regulators.
The buy and hold stock market strategy, which gained tremendous popularity in the 1970s, may no longer be such a profitable method for accumulating wealth for the average investor in the new millennium. This paper investigates the relationship between compound return and holding period length to see how long an Exchange Traded Fund (ETF) investment must be held before a positive return on principal is 100% likely. Because the ETF is a relatively new investment vehicle that could be considered particularly well-suited to the requirements of the buy and hold strategy, we begin our investigation here. We find that the compound returns earned over a rolling holding period are much more volatile than one might assume given historic rules of thumb for average return expectations. Using monthly return data for all listed NASDAQ ETFs between their date of inception and 2015, we find it takes ten years for the average probability of a gain on principal to be over 95 percent.
An analytical performance comparison of exchange-traded funds with index funds: 2002–2010
2011
Exchange-traded Funds (ETFs) have been gaining increasing popularity in the investment community, as evidenced by their high growth both in the number of ETFs created and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this article we examine whether this growing demand for ETFs can be explained through their outperformance as compared with index mutual funds. We consider the population of all ETFs with inception dates before 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had an inception date before 2002. This led to a sample of 230 paired matches for all the styles. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharpe Ratios and risk-adjusted buy and hold total returns for the period 2002–2010. We then applied the Wilcoxon signed rank test to ...
The impact of etfs and index funds on the stock markets
2019
Finance and investing are developing faster than ever, making the complex money machine hard to understand. The last two and half decades saw a completely new way of deploying cash that satisfied the necessity of small investor of having access to low cost tools for managing savings. Born in the early 90s passive funds such as ETFs and Index Stock Funds progressively took place into the market, changing the rules, the burdens and the boundaries of the game offering a new investment landscape, trading flexibility and the advantages of pooled capital raise. The chapter describes the two passive funds, breaking down the running process and the core features that characterize ETFs and Index Funds. 1.1.1 ETFs An ETF is an open investment fund listed on a stock exchange which tracks a benchmark-that might be an index or a specific basket of securities-by purchasing the same underlying assets and rebalancing the portfolio whenever the referred benchmark changes. These passive instruments are made up by a sponsor company that manages the creation-redemption process. The latter is completely different from mutual fund's one: mutual funds pool money from investors who subscribe fund quotes; then the sponsor company deploys investor's cash to acquire the individual securities from the market. ETFs do not receive retail investors' cash; they instead exchange fund shares for the individual securities-which will compose the underlying basket-with a provider called Authorized Participant 1. The latter is whom actually deals with retail investors and savers; it places ETF shares within the stock exchanges and receive cash in return 2. The creation-redemption process happens on the primary market whereas the trading activity happens on the secondary market. To ensure the running process works properly, the sponsor firm relies on one or more APs. In some case the AP and the issuer might coincide 3. The sponsor firm does not need to undertake neither the asset management nor the stock picking. It just simply tracks the reference benchmark and adjust its holding whenever 1 AP is an institutional firm, traditionally large banks or market makers, that is responsible for helping the sponsor of the ETF in the creation-redemption process (it is not legally obliged) through providing the underlying securities. Moreover, the AP is in charge of maintaining the market price of the ETF and the NAV aligned. To do so APs resort to the arbitrage process (it will be explained in point 1.2.2.) APs are the ones who are allowed to deal directly with the funds.