Broman and Shum examined the liquidity of exchange-traded funds (ETFs) and the mispricing of the ETFs. The authors believed that this study was the first to plunge into the "depth of factors that influence ETF flows.”
They did not find that all ETFs within their sample offered liquidity improvement. From their empirical analysis, they showed "that liquidity improvement strongly predicts future ETF net inflows, particularly in the price impact and the turnover dimensions.”
They recognized that tracking error and expense ratio had negative influences on liquidity while the "share creation/ redemption process had a positive influence." Institutions were motivated by improvements in liquidity; thus they increased investments in the ETFs.
Further, short-term institutional investors paid more attention to liquidity when purchasing ETFs than long-term institutions such as banks. Both the underlying portfolio of the index and the subject ETF registered negative effects causing mispricing.
These authors continued the investigation of the relationship between liquidity and mispricing, and they maintained that significant positive correlations exist between the two results.
Sources: http://ssrn.com/abstract=2361514.
Research verifies the existence of commonality in the mispricing of U.S ETFs
ETFs may not match their price to their net asset values. The investor should take caution with certain funds.
A study of 845 exchange traded funds on US exchanges show less liquid indices incurred larger absolute tracking errors.
Since ETFs are derivative securities, their sponsors have distinct choices to make about the selection of the underlying indexes upon which to base theirl ETFs
The individual needs of each investor plays a major role in the type of structure investments should have to be considered for inclusion in their portfolio.
Research verifies the existence of commonality in the mispricing of U.S ETFs
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