ETF Premiums and Liquidity Segmentation |
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| Authors: | Louis R Piccotti |
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| Affiliation: | University at AlbanyState University of New York |
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| 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. |
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| Keywords: | ETF premium liquidity segmentation limits to arbitrage tracking error G10 G11 G13 |
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