This 31-page paper appears in CFA Institute’s Financial Analysts Journal. It examines the topic of ETF pricing inefficiencies. Despite the arbitrage mechanism that allows authorized participants to create and redeem shares for the underlying portfolios, ETF prices can deviate significantly from the net asset values. Typically, the deviations are larger in funds holding international or illiquid securities. The author, Dr Antti Petajisto, introduces a novel approach that uses the cross section of prices on a group of similar ETFs to control for stale pricing of the underlying assets.
You can also tune into Dr Antti Petajisto’s webinar from earlier this year discussing the article.