The Pricing of Exchange Traded Funds and the Roles of Primary and Secondary Market Participants

2020 ◽  
Vol 10 (03) ◽  
pp. 2050013
Author(s):  
Gordon J. Alexander ◽  
Mark A. Peterson
Keyword(s):  
Market Efficiency ◽  
Secondary Market ◽  
Exchange Traded Funds ◽  
Direct Relation ◽  
Secondary Markets ◽  
Market Makers ◽  
Market Participants ◽  
Asset Value ◽  
Net Asset Value ◽  
Arbitrage Trading

We study the pricing of exchange traded funds (ETFs) and the associated arbitrage trading of them in the primary and secondary markets. We find a direct relation between primary and secondary market trading that is consistent with market-makers using the primary market to hedge their inventory risk in the secondary market, as well as to facilitate arbitrage. Such trading in both markets keeps ETF prices in line with their net asset value. We conclude that the existence of the primary market enhances secondary market efficiency.

scholarly journals Exchange-traded funds as an alternative investment option

2019 ◽  
pp. 7-37
Author(s):  
António Afonso ◽  
Pedro Cardoso
Keyword(s):  
Mutual Funds ◽  
Mutual Fund ◽  
Exchange Traded Funds ◽  
Price Efficiency ◽  
Index Funds ◽  
Equity Mutual Funds ◽  
Asset Value ◽  
Net Asset Value ◽  
Tracking Ability ◽  
Investment Option

We conduct an analysis of Exchange-traded Funds (ETFs), Index and Equity mutual funds and their respective benchmark during the 2010-2015 period for the Portuguese fund industry. For the period 2010-2017, we test ETFs for price inefficiency (existence of deviations between prices and the Net Asset Value) and persistence. We find that the studied ETF does not always outperform index funds in replicating the variations of the PSI 20 index, despite exhibiting better tracking ability when facing downside deviations of the benchmark and a better capacity of smoothing tracking deviations. Regarding ETFs price efficiency and its persistence, the study reveals that the examined ETF is priced at a low average discount with evidence of deviations persistence of at least two days. The investment schemes with the highest ability to track the PSI 20 Index were PSI20 (ETF), BBVA PPA Índice PSI20, and the equity mutual fund BPI Portugal.

scholarly journals Ten Years On: What Have We Learned? What Have We Done? What Must We Do?

2019 ◽  
Author(s):  
Robert C. Hockett
Keyword(s):  
Wealth Distribution ◽  
Central Banking ◽  
Secondary Market ◽  
System Structure ◽  
Labor Rights ◽  
Secondary Markets ◽  
Market Makers ◽  
Capital Ownership ◽  
Home Mortgage ◽  
National Investment

Ten years after the financial dramas of Autumn 2008, I take stock of what we have learned, what we have done, and what we have yet to do if we would avoid a repeat performance. The primary lessons I draw are that income and wealth distribution, the endogeneity of credit-money, and finance system structure all matter profoundly not only where justice, but also where systemic stability is concerned. The longer-term tasks still before us include a much broader and financially engineered diffusion of capital ownership over our population, citizen central banking, a permanent national investment authority, continuous public open labor market operations, debt-free or low-debt education and health insurance, and an updated form of segregating capital-raising primary from asset-trading secondary markets in the financial sector. Shorter-term tasks include debt-forgiveness, a restoration of labor rights and countercyclical progressive taxation, and restored citizen-ownership of our secondary market makers in home mortgage and higher education debt. These measures will restore the nation to its erstwhile status as a productive middle class ‘yeoman republic,’ and in so doing will restore both justice and efficiency to our social and economic arrangements.

scholarly journals Institutional Constraints on the Rate of Derivatives in Leveraged Exchange-Traded Fund

2020 ◽  
Vol 49 (2) ◽  
pp. 217-248
Author(s):  
Dowan Kim
Keyword(s):  
Tracking Error ◽  
Institutional Constraints ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Data Set ◽  
Asset Value ◽  
Net Asset Value ◽  
Institutional Constraint ◽  
Exchange Traded Fund ◽  
Leveraged Etf

This study confirmed whether the rate of derivatives in leveraged exchange-traded funds (ETF) calculated by derivatives and net asset value (NAV) affect their tracking errors. This research established three findings. First, when the rate of derivatives was limited at 100%, the tracking error of the leveraged ETF targeted on 2 times of the index was affected by the rate of derivatives. Second, when the rate of derivatives was eased to 200%, the same-day tracking error of the leveraged ETF targeted on 2 times of the futures index that launched after the constraints was affected by the rate of derivatives. Third, this study analyzed the constraints of the rate of derivatives after determining whether the leveraged ETF targeted on 2 times of the index indicates whether the rate of derivatives is close to 200%. As a result, even when the rate of derivatives is slightly over the 200% limit, the tracking error was lower. Even when the constraints were slightly over the limit, the tracking error was shown to be significantly lower than the other data set. This result implies that when there is an institutional constraint on the rate of derivatives, there can be limitations to fund management of leveraged ETF targeted on 2 times of the futures index.

scholarly journals Pricing Efficiency of Exchange Traded Funds in India

2020 ◽  
Vol 11 (1) ◽  
pp. 244-268
Author(s):  
Y V Reddy ◽  
Pinkesh Dhabolkar
Keyword(s):  
Stock Exchange ◽  
Market Price ◽  
Exchange Traded Funds ◽  
Demand And Supply ◽  
Correction Model ◽  
Vector Error Correction ◽  
Market Makers ◽  
Vector Error ◽  
Pricing Efficiency ◽  
Asset Value

Exchange traded funds (ETFs) have two prices, the market price and the net asset value (NAV) price. ETFs NAV price gets determined by the net value of the constituent assets, whereas the market price of ETFs depends upon the number of units bought or sold on the stock exchange during trading hours. As per the law of one price, the NAV and market price of the ETF should be the same. However, due to demand and supply forces, the market price may divert from its NAV. This price difference may have significant repercussions to investors, as it represents a cost if they buy overvalued ETF shares or sell undervalued ETF shares. Pricing efficiency is the speed at which the market makers correct the deviations between ETFs NAV and market price. The present study attempts to investigate the pricing efficiency of Indian equity ETFs employing an autoregression model over its price deviation, and also attempts to understand the lead-lag relationship between the price and NAV using the vector error correction model (VECM).

Investor protection, valuation methods and the German alternative funds industry

2018 ◽  
Vol 19 (2) ◽  
pp. 174-189 ◽  
Author(s):  
Bernd Hoffmann ◽  
Karsten Paetzmann
Keyword(s):  
Asset Management ◽  
Design Methodology ◽  
Investor Protection ◽  
The European Union ◽  
Content Type ◽  
Market Participants ◽  
Asset Value ◽  
Net Asset Value ◽  
The Subject ◽  
Asset Classes

Purpose This paper aims to present the rules for determining the net asset value according to the AIFM Directive which have fundamentally changed regulation of the European alternative funds industry. The paper discusses how these rules must be applied to ensure a reliable and objective valuation and to protect the interests of investors. Design/methodology/approach The paper draws upon experience gained in the market following the implementation of rules on fund valuation in the European Union in 2011 and further in Germany in 2013. The valuation rules for relevant asset classes are presented and discussed in the light of the overarching goal of investor protection. Findings The paper’s findings show that the market participants saw the increased requirements as an opportunity and that they have adapted to the new system. This also applies to fund valuation, even though some people criticise terminology, lack of clarity and the complexity of the new valuation scheme from a practical perspective. Also, due to the increased valuation requirements, a consolidation among market participants can be expected. Originality/value The issues addressed in the paper are currently the subject of debate by regulators and market participants. There are direct implications for future prudential regulation in the asset management industry.

A study on the relationship between price and net asset value of the exchange traded funds in India

2016 ◽  
Vol 12 (2) ◽  
pp. 31
Author(s):  
Dharani Munusamy ◽  
Vijayakumar Narayanamurthy ◽  
Muruganandam Sivanmalaiappan
Keyword(s):  
Exchange Traded Funds ◽  
Asset Value ◽  
Net Asset Value ◽  
The Relationship

scholarly journals REVISITING GOLD'S SAFE HAVEN STATUS WITH THE UTILIZATION OF THE INDEX OF IMPLIED VOLATILITY AND VALUES OF EXCHANGE TRADED FUNDS

2021 ◽  
Vol 10 ◽  
pp. 24-39
Author(s):  
Dimitrios Panagiotou
Keyword(s):  
Implied Volatility ◽  
Exchange Traded Funds ◽  
Quantile Regressions ◽  
Safe Haven ◽  
Statistical Tool ◽  
Volatility Index ◽  
Asset Value ◽  
The Us ◽  
Net Asset Value

The coronavirus pandemic is a health and economic crisis which has placed an immense strain on the world’s financial system. Hence, amidst the (still ongoing) Covid-19 pandemic, the objective of this work is to investigate the role of gold as as a hedge or safe haven with the use of exchange traded funds. The present work employs the implied volatility index of gold share options (GVZ), the net asset value of the price per share of the US Oil Fund options (USO) and the value of the Currency Share Euro Trust (FXE). The statistical tool utilized is the quantile regressions methodology. Data are daily observations from June 2008 to December 2018.  The empirical results reveal that gold's implied volatility decreases significantly (or it is not statistically different than zero), under changes in the average returns and/or under extreme market declines in FXE and USO. According to the aforementioned findings, gold could be an investment vehicle to serve as a hedge and or a safe haven asset. The present study is the first one to employ quantile regressions (QR) along with gold's implied volatility and the prices of exchange traded funds (ETFs) in order to investigate gold's hedge and/or safe haven properties.

Reconsidering Returns

2021 ◽  
Author(s):  
Samuel M Hartzmark ◽  
David H Solomon
Keyword(s):  
Mutual Funds ◽  
Price Index ◽  
Market Performance ◽  
Performance Expectations ◽  
Asset Value ◽  
Net Asset Value ◽  
Perception Of Performance ◽  
Predictable Returns

Abstract Investors’ perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends, thereby underreporting market performance. Newspapers are more pessimistic on ex-dividend days, consistent with mistaking the index for returns. Market betas should track returns, but track prices more than dividends, creating predictable returns. Mutual funds receive inflows for “beating the S&P 500” price index based on net asset value (also not a return). Investors extrapolate market indices, not returns, when forming annual performance expectations. Displaying returns by default would ameliorate these issues, which arise despite high attention and agreement on the appropriate measure.

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