Steering a Ship in Illiquid Waters: Active Management of Passive Funds / Naz Koont, Yiming Ma, Lubos Pastor, Yao Zeng.

By:

Koont, Naz

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30039.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Exchange-traded funds (ETFs) are typically viewed as passive index trackers. In contrast, we show that corporate bond ETFs actively manage their portfolios, trading off index tracking against liquidity transformation. In our model, ETFs optimally choose creation and redemption baskets that include cash and only a subset of index assets, especially if those assets are illiquid. Our evidence supports the model's predictions. We find that ETFs dynamically adjust their baskets to correct portfolio imbalances while facilitating ETF arbitrage. Basket inclusion improves bond liquidity, except in periods of large imbalance between ETF creations and redemptions, such as the COVID-19 crisis of 2020.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30039 (Browse shelf(Opens below))	Not for loan

Total holds: 0

May 2022.

Exchange-traded funds (ETFs) are typically viewed as passive index trackers. In contrast, we show that corporate bond ETFs actively manage their portfolios, trading off index tracking against liquidity transformation. In our model, ETFs optimally choose creation and redemption baskets that include cash and only a subset of index assets, especially if those assets are illiquid. Our evidence supports the model's predictions. We find that ETFs dynamically adjust their baskets to correct portfolio imbalances while facilitating ETF arbitrage. Basket inclusion improves bond liquidity, except in periods of large imbalance between ETF creations and redemptions, such as the COVID-19 crisis of 2020.