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Article
Publication date: 30 November 2016

Dong Hyun Choi and Junesuh Yi

This study analyses empirically the Granger causality between commodity ETFs listed in KRX (Korea Stock Exchange) and the price determinants of the underlying commodities…

Abstract

This study analyses empirically the Granger causality between commodity ETFs listed in KRX (Korea Stock Exchange) and the price determinants of the underlying commodities as well as the KOSPI200 index and the underlying indices, and compares the performance of four commodity ETFs : gold futures, oil futures, soybean futures and the copper price. The main findings are as follows : First, the commodity ETFs tracking gold futures, oil futures and soybean futures prices in the sample from the inception to June 2015 were not directly related to the price determinants of the underlying commodities except for the copper ETF which was affected by the oil price as one of the price determinants of copper. In addition, all four ETFs were not related to the KOSPI200 index while they were affected by the underlying indices. Second, the soybean futures ETF outperformed the KOSPI200 index in terms of the cumulative returns and the oil futures ETF recorded the worst performance in terms of the cumulative returns and IR (information ratio). Third, the average tracking error of each ETF except for the oil futures ETF showed a positive value and the price of each ETF except for the soybean futures ETF has been undervalued compared to its net asset value. From the above findings, we can infer that investors in the copper ETF should closely watch the movement of the oil price to enhance the return and investors in the commodity ETFs should first consider agriculture-related ETFs rather than oil-related ETFs considering the price volatility. In addition, the inverse ETFs for copper and agriculture-related products should be introduced following the oil and gold futures inverse ETFs to protect against negative returns in a declining period of commodity prices.

Details

Journal of Derivatives and Quantitative Studies, vol. 24 no. 4
Type: Research Article
ISSN: 2713-6647

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Article
Publication date: 25 May 2021

Manuel Lobato, Javier Rodríguez and Herminio Romero

This study examines the risk-adjusted performance of socially responsible exchange traded funds (SR ETFs) in comparison to conventional ETFs.

Abstract

Purpose

This study examines the risk-adjusted performance of socially responsible exchange traded funds (SR ETFs) in comparison to conventional ETFs.

Design/methodology/approach

The main empirical result is based on a risk-adjusted performance metric that does not rely on a linear framework. It measures the difference between the returns of an ETF and the returns of a volatility-match and efficient portfolio. In addition, performance is measured using alpha based on single and multifactor formulations.

Findings

Results show that the performance of SRI ETFs is not different from the performance of conventional ETFs.

Originality/value

Given the results of the study, socially aware investors can choose to invest in SRI ETFs without sacrificing performance.

Details

The Journal of Risk Finance, vol. 22 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 July 2006

Michael R. Rosella and Domenick Pugliese

To discuss how product innovations in exchange‐traded funds (ETFs) have blurred the line between passive and active management, and to explore the legal ramifications of…

Abstract

Purpose

To discuss how product innovations in exchange‐traded funds (ETFs) have blurred the line between passive and active management, and to explore the legal ramifications of these developments.

Design/methodology/approach

Describes how ETFs operate and how the ETF marketplace has grown; discusses the use of broad‐based indexes for most ETFs until recently; describes newer ETFs that provide targeted exposure to narrow market segments; and discusses underlying indexes that are based on performance‐based characteristics rather than market segments, along with possible difficulties in making performance‐based criteria widely available to investors.

Findings

Historically the SEC has expressed skepticism over actively managed ETFs because of uncertainty as to whether they can provide the same portfolio transparency and arbitrage opportunity that traditional ETFs can. As “Rule Sets,” or criteria for including companies in performance indexes, become more involved and less objective, the challenge will be to ensure that sufficient arbitrage opportunities exist to ensure pricing efficiency. If that challenge can be met, it may serve as a model for a truly actively managed ETF.

Originality/value

Explains how the new generation of ETFs is coming closer to the line of active management and the legal issues that must be surmounted before truly actively managed ETFs are offered.

Details

Journal of Investment Compliance, vol. 7 no. 3
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 4 September 2017

Adam Teufel and Christopher J. Geissler

To introduce and analyze recent amendments to the rules of three US securities exchanges to add specific continued listing standards applicable to exchange-traded funds (ETFs).

Abstract

Purpose

To introduce and analyze recent amendments to the rules of three US securities exchanges to add specific continued listing standards applicable to exchange-traded funds (ETFs).

Design/methodology/approach

Provides an introduction and summary overview of the topic, summarizes the scope of the rule changes, discusses the industry reaction to the proposed rule changes and the regulator’s response, notes the applicability of the rule changes to ETFs relying on their own fund-specific regulatory relief, and identifies compliance dates.

Findings

Each of three US securities exchanges filed separate proposals to amend their listing standards to add specific continued listing standards for ETFs. Notwithstanding various concerns expressed in comment letters from key industry participants, by March 2017 the Securities and Exchange Commission (SEC) approved all three proposals in substantially the form proposed.

Practical implications

ETF sponsors should note that significant compliance enhancements may be required to ensure proper and continuous testing of securities in an ETF’s underlying index and/or portfolio in lieu of testing for compliance solely at the time of initial listing or at the time of an investment decision. The rule changes are scheduled to take effect by October 1, 2017.

Originality/value

Practical analysis from a premier financial services law firm on the issues presented by the ETF rule changes.

Details

Journal of Investment Compliance, vol. 18 no. 3
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 28 June 2013

Kurt Decko and Stacy Fuller

The purpose of this paper is to explain the announcement and no‐action letter of December 11, 2012 from the Securities and Exchange Commission (“SEC”) Division of…

Abstract

Purpose

The purpose of this paper is to explain the announcement and no‐action letter of December 11, 2012 from the Securities and Exchange Commission (“SEC”) Division of Investment Management lifting the moratorium on the use of derivatives by actively managed exchange‐traded funds (ETFs) but continuing the moratorium on use of derivatives by leveraged ETFs.

Design/methodology/approach

The paper explains the background, including the moratorium that went into effect as the SEC conducted a review of the use of derivatives by mutual funds, ETFs and other investment companies; the lifting of the moratorium; two representations ETFs that propose to use derivatives must make in their exemptive applications to the SEC; the implications for ETFs that make those representations; and the next steps for ETFs currently in the exemptive applications process.

Findings

While it does not mean the end of the SEC staff's review of derivative usage by ETFs generally, the lifting of the moratorium is a welcome development that restores actively managed ETFs' ability to compete largely on an equal footing with other vehicles in many investment strategies.

Practical implications

While the representations do not appear to impose substantive new disclosure requirements for ETFs, the difficulty, if any, could be that these representations will now be required by the terms of the exemptive relief on which they rely for all their operations.

Originality/value

The paper provides practical advice from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 14 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 7 September 2015

Stoyu I. Ivanov

The purpose of this paper is to find if erosion of value exists in grantor trust structured exchange traded funds. The author examines the performance of six currency…

Abstract

Purpose

The purpose of this paper is to find if erosion of value exists in grantor trust structured exchange traded funds. The author examines the performance of six currency exchange traded funds’ tracking errors and pricing deviations on intradaily-one-minute interval basis. All of these exchange traded funds are grantor trusts. The author also studies which metric is of more importance to investors in these exchange traded funds by examining how these performance metrics are related to the exchange traded funds’ arbitrage mechanism.

Design/methodology/approach

The Australian Dollar ETF (FXA) is designed to be 100 times the US Dollar (USD) value of the Australian Dollar, the British Pound ETF (FXB) is designed to be 100 times the USD value of the British Pound, the Canadian Dollar ETF (FXC) is designed to be 100 times the USD value of the Canadian Dollar, the Euro ETF (FXE) is designed to be 100 times the USD value of the Euro, the Swiss Franc ETF (FXF) is designed to be 100 times the USD value of the Swiss Franc and the Japanese Yen ETF (FXY) is designed to be 10,000 times the USD value of the Japanese Yen. The author uses these proportions to estimate pricing deviations. The author uses a moving average model based on an Elton et al. (2002) to estimate if tracking error or pricing deviation are more relevant in ETF arbitrage and thus to investors.

Findings

The author documents that the average intradaily tracking errors for the six currency ETFs are relatively small and stable. The tracking errors are highest for the FXF, 0.000311 percent and smallest for FXB, −0.000014 percent. FXB is the only ETF with a negative tracking error. All six ETFs average intradaily pricing deviations are negative with the exception of the FXA pricing deviation which is a positive $0.17; the rest of the ETFs pricing deviations are −0.3778 for FXB, −0.3231 for FXC, −0.2697 for FXC, −0.2697 for FXE, −0.6484 for FXF and −0.9273 for FXY. All exhibit skewness, kurtosis, very high levels of positive autocorrelation and negative trends, which suggests erosion of value. The author also found that these exchange traded funds’ arbitrage mechanism is more closely related to the exchange traded funds’ pricing deviation than tracking error.

Research limitations/implications

The paper uses high-frequency one-minute interval data in the analysis of pricing deviation which might be artificially deflating standard errors and thus inflating the t-test significance values.

Originality/value

The paper is relevant to ETF investors and contributes to the continuing search in the finance literature of better ETF performance metric.

Details

International Journal of Managerial Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1743-9132

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Abstract

Details

The Savvy Investor's Guide to Building Wealth Through Traditional Investments
Type: Book
ISBN: 978-1-83909-608-2

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Book part
Publication date: 26 February 2016

Desmond Pace, Jana Hili and Simon Grima

In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between…

Abstract

Purpose

In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between active and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a bone of contention since the inception of these investment structures. Accordingly, the objective of this chapter is to distinctly underscore whether an investor should be concerned in choosing between active and diverse passive investment structures.

Methodology/approach

The survivorship bias-free dataset consists of 776 equity funds which are domiciled either in America or Europe, and are likewise exposed to the equity markets of the same regions. In addition to geographical segmentation, equity funds are also categorised by structure and management type, specifically actively managed mutual funds, index mutual funds and passive exchange traded funds (‘ETFs’). This classification leads to the analysis of monthly net asset values (‘NAV’) of 12 distinct equally weighted portfolios, with a time horizon ranging from January 2004 to December 2014. Accordingly, the risk-adjusted performance of the equally weighted equity funds’ portfolios is examined by the application of mainstream single-factor and multi-factor asset pricing models namely Capital Asset Pricing Model (Fama, 1968; Fama & Macbeth, 1973; Lintner, 1965; Mossin, 1966; Sharpe, 1964; Treynor, 1961), Fama French Three-Factor (1993) and Carhart Four-Factor (1997).

Findings

Solely examination of monthly NAVs for a 10-year horizon suggests that active management is equivalent to index replication in terms of risk-adjusted returns. This prompts investors to be neutral gross of fees, yet when considering all transaction costs it is a distinct story. The relatively heftier fees charged by active management, predominantly initial fees, appear to revoke any outperformance in excess of the market portfolio, ensuing in a Fool’s Errand Hypothesis. Moreover, both active and index mutual funds’ performance may indeed be lower if financial advisors or distributors of equity funds charge additional fees over and above the fund houses’ expense ratios, putting the latter investment vehicles at a significant handicap vis-à-vis passive low-cost ETFs. This chapter urges investors to concentrate on expense ratios and other transaction costs rather than solely past returns, by accessing the cheapest available vehicle for each investment objective. Put simply, the general investor should retreat from portfolio management and instead access the market portfolio using low-cost index replication structures via an execution-only approach.

Originality/value

The battle among actively managed and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a grey area since the inception of mutual funds. The interest in the subject constantly lightens up as fresh instruments infiltrate financial markets. Indeed the mutual fund puzzle (Gruber, 1996) together with the enhanced growth of ETFs has again rejuvenated the active versus passive debate, making it worth a detailed analysis especially for the benefit of investors who confront a dilemma in choosing between the two management styles.

Details

Contemporary Issues in Bank Financial Management
Type: Book
ISBN: 978-1-78635-000-8

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Investment Traps Exposed
Type: Book
ISBN: 978-1-78714-253-4

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Book part
Publication date: 11 August 2014

Reena Aggarwal and Laura Schofield

Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market, they have become popular among…

Abstract

Purpose

Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market, they have become popular among both retail and institutional investors. The original ETFs were simple and easy to understand; however, recent products, such as leveraged, inverse, and synthetic ETFs, are more complex and have additional dimensions of risk. The additional risks, complexity, and reduced transparency have resulted in heightened attention by regulators. This chapter aims to increase understanding of how ETFs function in the market and can potentially impact financial stability and market volatility.

Design/methodology/approach

We discuss the evolution of ETFs, growing regulatory concerns, and the various responses to these concerns.

Findings

We find that concerns related to systemic risk and excess volatility, suitability for retail investors, lack of transparency and liquidity, securities lending and counterparty exposure are being addressed by both market participants and policy makers. There has been a shift toward multiple counterparties, overcollateralization, disclosure of collateral holdings and index holdings.

Originality/value

The analysis contained in this chapter provides an understanding of the role of ETFs in the financial markets and the global economy that should be valuable to market participants, investors, and policy makers.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78350-120-5

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