John Hinrichs

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Broman and Shum examined the liquidity of exchange-traded funds (ETFs) and the mispricing of the ETFs. The authors believed that this study was the first to plunge into the "depth of factors that influence ETF flows.” 

They did not find that all ETFs within their sample offered liquidity improvement. From their empirical analysis, they showed "that liquidity improvement strongly predicts future ETF net inflows, particularly in the price impact and the turnover dimensions.”

They recognized that tracking error and expense ratio had negative influences on liquidity while the "share creation/ redemption process had a positive influence." Institutions were motivated by improvements in liquidity; thus they increased investments in the ETFs. 

Further, short-term institutional investors paid more attention to liquidity when purchasing ETFs than long-term institutions such as banks. Both the underlying portfolio of the index and the subject ETF registered negative effects causing mispricing. 

These authors continued the investigation of the relationship between liquidity and mispricing, and they maintained that significant positive correlations exist between the two results.


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