ETFs, Anomalies and Market Efficiency

Ilias Filippou, Songrun He, Sophia Zhengzi Li, Guofu Zhou
June 2023
SSRN

Abstract

We construct a stock-level composite mispricing score CZ Net based on over 200 anomalies. We find that a long-short CZ Net portfolio formed by low ETF ownership stocks yields higher returns, greater Sharpe ratios, and more significant alphas compared to the portfolio formed by high ETF ownership stocks. Furthermore, low ETF ownership stocks exhibit greater price delay and lower information efficiency. These findings remain robust after controlling for characteristics related to short-sale constraints, arbitrage costs, and the information environment. Using Russell index reconstitution as a natural experiment, we provide additional causal evidence of ETF ownership attenuating anomaly profits.

Songrun He
Songrun He
Ph.D. Student in Finance

I am a Ph.D. student in finance at WUSTL with an interest in asset pricing, investment strategies, asset management, machine learning and deep learning in finance, textual analysis and high-frequency finance.