A Study on Pricing Efficiency and Replication Strategy of Exchange Traded Funds
Keywords:Replication Strategy, Passive Investment, Tracking Error, Persistence Performance
AbstractThe study mainly investigating the pricing efficiency and replication strategy of exchange traded funds in the select segment of Equity ETFs and Gold ETFs during the period of 2012-2017. The study employed the famous market model (CAPM) to examine the replication strategy, pricing efficiency, tracking error and persistence performance of select exchange traded funds. The study concludes that Equity ETFs viz., Edelwiese AMC ETF, Motilal Oswal AMC ETF, Quantum AMC ETF and Gold ETFs viz., AIXS Gold ETF, IDBI Gold ETF, Quantum Gold ETF are adopting Selective replication strategy during the study period. During the study period it was evident that except Edelweiss AMC ETF, all other ETFs viz., Motilal Oswal AMC ETF, Quantum AMC ETF, Axis Gold ETF, IDBI Gold ETF, Quantum Gold ETFs are closely tracking the index and managing the tracking errors at an acceptable level. It indicates that all five funds are replicating the index closely. The study revelead that except Motilal Oswal M-50 ETF remaining all ETFs viz., Edelweises Equity ETF, IDBI Gold ETF, Quantum Equity ETF, Axis Gold ETF, Quantum NIFTY Gold ETFs are delievring premiums to investors.
Amenc, N., & Martellini, L., Meyfredi, J.-C., Ziemann, V. (2010). Passive Hedge Fund Replication -Beyond the Linear Case. European Financial Management. 16(2), 191–210. https://doi.org/10.1111/j.1468-036X.2008.00448.x
Chu, P. K.-K. (2011). Study on Tracking Errors and their Determinants: Evidence from Hong Kong Exchange Traded Funds, Routledge Taylor and Francis Group, 7.
Hasanhodzic, J., & Lo, A. W. (2007). Can Hedged Funds Returns be Replicated?: The Linear Case. Journal of Investment Management. 5(2), 5–45.
Kostovetsky, L. (2003). Index Mutual Funds and Exchange Traded Funds. Summer.
Maluf, Y. S. (2011). Empirical Evidence: Arbitrage with Exchange Traded Funds (ETFs) on the Brazilian Market. XIth Brazilian Finance Meeting, Rio de Janeiro, RJ., 11.
Narend, S. (2014). Performance of ETF and Index Funds. NSE Paper, 18.
Purohit, H. (2015). Pricing Efficiency and Performance of Exchange Traded Funds in India. IUP- National Ninth Conference on Indian Capital Market-Emerging Issues, 21.
Rompotis, G. (2012). The German Exchange Traded Funds. The IUP Journal of Aplied Finance, 18(4).
Swathy. (2015). An Empirical Analysis of Pricing Efficiency of Exchange Traded Funds in India. International Journal of Engineering and Management Sciences, 5.
Verdu. (2012). The Efficiency of Exchange-Traded Funds as a market investment. Master Thesis, Tilburg University.