Ruan and Ma investigated what happens when exchange-traded funds (ETFs) went ex-dividend as compared to control samples of equity closed-end funds (CEFs) and matched stocks. The authors measured transaction costs and risks. ETFs exhibited some favorable attributes compared to the CEFs and matched equities. For example, ETFs had lower transaction costs and lower risks than equity CEFs, and much lower risks than matched stocks based on dividend yield and various transaction cost measures. Additionally, they discovered no price anomalies for equity ETFs on ex-dividend days, and that neither transaction costs nor risks have a material effect on the ex-day price behavior. For both equity ETFs and equity CEFs the price drops on the ex-dividend dates were not appreciably different than the amount of the dividends. They compared all three products based on transaction costs, and found that the ex-day price anomalies disappear in the ETFs and CEFs, but remained in the matched stocks. The authors argued that these price reversions away from anomalies suggested the presence of tax-neutral arbitrageurs as the marginal traders around the ex-days . . . .” These pricing actions were consistent with the activities of arbitrageurs: abnormal volumes on the ex-day are detected in ETFs and control samples. In summary, the authors elaborated that liquidity and risks remain important to traders of equity CEFs and matched stocks even considering the tax differentials of individual investors. However, for equity ETFs the transaction costs and risks are largely unrelated to abnormal returns. This study did not show abnormal volumes on the ex-dividend days for the equity ETFs. The authors stated that the lower transaction costs and risks for equity ETFs as compared with equity CEFs and matched stocks accounted for this advantage to the equity ETFs. Generally, this research supported the more positive action for equity ETFs on ex-dividend dates when compared to control samples of equity CEFs and matched stocks.
Source: Ruan, J., & Ma, T. (2012). Ex-Dividend Day Price Behavior of Exchange-Traded Funds. The Journal of Financial Research, XXXV (1), 29-53.
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