Abstract
If exchange-traded fund prices diverge from net asset values, institutional investors may arbitrage the shares through an in-kind creation/redemption process sponsored by the fund company. This study analyzes the size and duration of exchange-traded fund premiums and the efficacy of arbitrage in reducing these premiums. While premiums are observed, they are rarely persistent. The fund-facilitated arbitrage process is generally successful in aligning price and value. However, even small premium fluctuations can mean the difference between a profit and loss for the short-term investors who dominate the trading of these securities.
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