The Effect of Portfolio Composition on the Pricing Efficiency of Exchange Traded Funds

Kim, Soojung; Choi, Hyung-Suk

doi:2018.47.1.1

Korean J Financ Stud > Volume 47(1); 2018 > Article

Korean Journal of Financial Studies 2018;47(1):1-25.
DOI: https://doi.org/10.26845/KJFS.2018.02.47.1.1 Published online February 28, 2018.

The Effect of Portfolio Composition on the Pricing Efficiency of Exchange Traded Funds

Soojung Kim, Hyung-Suk Choi

구성자산 특성이 ETF 가격효율성에 미치는 효과

김수정, 최형석

이화여자대학교

Abstract

In this study we examine the pricing efficiency of the eight exchange traded funds (ETFs) that are listed in the Korean Stock Exchange in order to understand the effect of portfolio composition on the pricing efficiency of ETFs. These ETFs follow the same KOSPI200 index but they construct the portfolio with different weight and their investor composition between individual investors and institutional investors are different as well. We examine the panel data for these ETFs from January 2003 to December 2014 on a daily basis, which include the trading characteristics of ETFs in the stock market and the characteristics of portfolio composition of each ETF. From the year fixed effects regression analysis, we find that size, daily volatility, and cash-ratio decrease the pricing efficiency by increasing the ETF differential ratio. Also, ETFs putting more weight on stocks with higher prior-return and higher volume show higher efficiency but ETFs putting more weight on stocks with bigger size and greater book-to-market ratio show lower efficiency. For the ETFs that individual investors trade more actively, we find that the influence gets stronger as ETFs put more weight on book-to-market ratio. Overall, this study provides the empirical evidence that not only the trading characteristics of ETFs but also the characteristics of portfolio composition would affect the pricing efficiency, which has not been examined in the previous literature. We conjecture that an ETF can be constructed to minimize the differential between ETF price and its net asset value by utilizing this relation and that the efficiency of ETF market will be enhanced eventually.

Key Words: 상장지수펀드(ETF),괴리율,추적오차,가격효율성,자산구성파일(PDF),Exchange Traded Fund (ETF),Differential,Tracking Error,Pricing Efficiency,Portfolio Deposit File (PDF)