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Effects of Liquidity on TE and Performance of Japanese ETFs

Author

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  • Atsuyuki Naka

    (Henry Bernstein College of Business Administration, University of New Orleans, New Orleans, LA 70148, USA)

  • Jiayuan Tian

    (School of Business and Entrepreneurship, Dickinson State University, Dickinson, ND 58601, USA)

  • Seungho Shin

    (Lutgert College of Business, Florida Gulf Coast University, Fort Myers, FL 33965, USA)

Abstract

This study identifies a nonlinear relationship among liquidity, tracking error, and risk-adjusted performance in JETFs. Collecting daily data for 1077 JETFs from January 2008 to April 2022, we find a concave association, whereby both highly liquid and highly illiquid JETFs exhibit lower risk-adjusted returns and higher tracking errors. Employing quantile regression, we further show that smaller, less liquid JETFs tend to deliver superior risk-adjusted performance. When comparing across listing venues—Japan, the U.S., Ireland, and Luxembourg—we find that the impact of liquidity on performance is most pronounced in the Japanese market, which also shows the highest average tracking error. In contrast, U.S.-listed JETFs offer the lowest tracking error. These results suggest that investors may benefit from choosing smaller JETFs listed in Japan.

Suggested Citation

  • Atsuyuki Naka & Jiayuan Tian & Seungho Shin, 2025. "Effects of Liquidity on TE and Performance of Japanese ETFs," IJFS, MDPI, vol. 13(3), pages 1-32, September.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:3:p:168-:d:1745183
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    References listed on IDEAS

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