The anatomy of bond ETF arbitrage

Karamfil Todorov

BIS Quarterly Review, 2021

Abstract: Exchange-traded funds (ETFs) allow a wide range of investors to gain exposure to a variety of asset classes. They rely on authorised participants (APs) to perform arbitrage, ie align ETFs' share prices with the value of the underlying asset holdings. For bond ETFs, prominent albeit understudied features of the arbitrage mechanism are systematic differences between the baskets of bonds used to create and redeem ETF shares, and a low overlap between these baskets and actual asset holdings. These features could reflect the illiquid nature of bond trading, ETFs' portfolio management and APs' incentives. The decoupling of baskets from holdings weakens arbitrage forces but allows ETFs to absorb shocks on the bond market.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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