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ETF Premiums and Liquidity Segmentation

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  • Louis R. Piccotti

Abstract

Exchange traded funds (ETFs) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to net asset value (NAV) as well as the life†cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESDs) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.

Suggested Citation

  • Louis R. Piccotti, 2018. "ETF Premiums and Liquidity Segmentation," The Financial Review, Eastern Finance Association, vol. 53(1), pages 117-152, February.
    • Handle: RePEc:bla:finrev:v:53:y:2018:i:1:p:117-152
    DOI: 10.1111/fire.12148
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    Cited by:

    1. Piccotti, Louis R., 2020. "Strategic trade when securitized portfolio values are unknown," Journal of Banking & Finance, Elsevier, vol. 115(C).
    2. Damien Kunjal & Faeezah Peerbhai & Paul-Francois Muzindutsi, 2021. "The performance of South African exchange traded funds under changing market conditions," Journal of Asset Management, Palgrave Macmillan, vol. 22(5), pages 350-359, September.
    3. Goel, Garima & Ahluwalia, Eshan, 2021. "Do pricing efficiencies in Indian equity ETF market impact its performance?," Global Finance Journal, Elsevier, vol. 49(C).

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