Bond ETF Arbitrage Strategies and Daily Cash Flow

Abstract

Bond ETFs trading at a premium (discount) to NAV experience more creations (redemptions) than those trading at parity. When these transactions occur, subsequent returns partially offset the premium or discount. These results suggest that arbitrage trading between the underlying bonds and the ETFs has a significant impact on market returns. However, in the absence of cash flow, premiums and discounts persist. The authors consider market factors that discourage arbitrage trading around premiums and discounts, and find these anomalies persist in part due to costs and uncertainty in the secondary market.