Three Essays On The Microstructure Of Exchange Traded Funds PDF Download

This dissertation consists of three essays on exchange-traded funds (ETFs). The dissertation research seeks to contribute to a deeper understanding of the impact of ETFs upon the financial markets, discover insights into the realm of performance persistence, and identify the factors leading to ETF liquidations. The first essay investigates the impact that sector exchange-traded funds have upon stocks that they hold. We find that sector ETF ownership is associated with stock return comovement, especially with other industry stocks that are also held by sector ETFs. We show that sector ETF ownership is related to a muted abnormal return and trading volume reaction to earnings surprises. Even when considering other types of institutional investors, sector ETFs appear to be the main driver behind these findings. The second essay documents the existence of ETF performance persistence. This calls into question interpretations used in the mutual fund literature suggesting performance persistence is evidence of manager skill. Given their passive nature, performance persistence should not exist amongst ETFs if the sole source of this persistence is manager skill. A decomposition of performance into stock composition and industry exposure sources reveals that this persistence is attributable predominately to a fund's industry exposure. Furthermore, the underlying source of the persistence is a flow-driven return effect where fund flows place price pressure on stocks leading to persistence in fund returns. An industry flow-based explanation best accounts for positive persistence of winners while stock flow-based reasons better explain persistence of past losers. The third essay studies the determinants of ETF liquidations. Investors are subject to tax, trading, and search costs as a result of holding a liquidated fund. I find that fund size and flows are essential to a fund's survival. Larger fund families are also more likely to produce funds that will avoid liquidation. Funds that are latecomers to a trending category that subsequently underperforms are less likely to survive. Finally, I find that the average investor holding a fund with an upcoming liquidation is best served to immediately sell the liquidating fund and purchase other funds in the same category.