By |Published On: December 8th, 2016|Categories: Uncategorized, ETF Investing|

Zahi Ben-David has an excellent new summary paper on the state of academic research on exchange traded funds with colleagues Rabih Moussawi and Francesco Fanzoni.(1)

The fact Zahi is a thought leader on ETFs and we are in the ETF business is kinda interesting because Zahi and I were definitely not talking about ETFs when we first met nearly 15 years ago! (2)

I love the graphic from the paper that outlines how ETF abritrage works, which also helps investors understand the dynamics of how ETFs trade in the secondary market. See below:

etf-arbitrage
Here is the abstract and a link to the paper if you’d like to dig in:

Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.

We’ll be following up with Zahi to get some in-depth answers on his thoughts about the future of the ETF marketplace. Stay tuned!

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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