A Cross-Country Analysis of Pricing Efficiency of Exchange Traded Funds

Abstract

This study empirically compares the pricing efficiency of Exchange Traded Funds (ETFs) across countries in terms of the deviations of trading price from Net Asset Value (NAV) as well as the persistence of such deviations. A sample of 17 ETFs tracking popular equity indices of five dominant countries, namely, US, UK, Japan, Australia and India, are analyzed in this study over a period ranging from April 1, 2000 to March 31, 2012. We find evidence of varying levels of pricing efficiency across countries whereby the US ETFs emerge to be the most price-efficient, with minimum daily deviations between price and NAV averaging less than 0.15% which disappears within a day due to effective arbitrage mechanism. Indian ETFs, on the other hand, are found to be the most price-inefficient, experiencing not only exceptionally high daily deviations averaging from 0.52% to 1.40%, but also persist for three days for most ETFs. These findings indicate gross pricing inefficiencies and the presence of unexploited arbitrage opportunities in the Indian ETF market which commands immediate attention of the market players. To the best of our knowledge, there has been no previous published research study which empirically compares the pricing efficiency of ETFs across countries and this is the first such attempt in this direction.