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A hidden cost of ETF investing: Retail demand shocks and limits to arbitrage

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  • Liu, Xin
  • Zhang, Tianyao (Terry)
  • Zhang, Yaodong

Abstract

By decomposing close-to-close mid-quote returns of ETFs into their overnight and intraday components, we find that the overnight return is significantly positive, whereas the intraday return is negative. This overnight–intraday return differential is ubiquitous across ETFs tracking different asset classes or assets located in different time zones. This phenomenon cannot be explained by differences in overnight and intraday risks, macroeconomic announcements, or information asymmetry. Instead, our analysis reveals that the return pattern is primarily driven by demand shocks from retail investors and limited supply from arbitrageurs. These results indicate that the convenience of buying ETFs during intraday trading hours carries a hidden cost to investors.

Suggested Citation

  • Liu, Xin & Zhang, Tianyao (Terry) & Zhang, Yaodong, 2026. "A hidden cost of ETF investing: Retail demand shocks and limits to arbitrage," Journal of Banking & Finance, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:jbfina:v:185:y:2026:i:c:s0378426625002419
    DOI: 10.1016/j.jbankfin.2025.107621
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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