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

Format:

Book

Author/Creator:

Koont, Naz.

Contributor:

National Bureau of Economic Research.

Ma, Yiming.

Pastor, Lubos.

Zeng, Yao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30039.

NBER working paper series no. w30039

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

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. We find that ETFs dynamically adjust their baskets to correct portfolio imbalances while facilitating ETF arbitrage. Basket inclusion improves bond liquidity in general, but worsens it in periods of large imbalance between creations and redemptions, such as the COVID-19 crisis.

Notes:

Print version record

May 2022.