Finance Webinar（2021- 52）-Job talk

Topic: Should Passive Investors Actively Manage Their Trades?

Speaker: Sida Li, University of Illinois

Time: Friday, December 31，9:30-11:00 a.m. Beijing Time

Location: Microsoft Teams

Abstract：

Using novel daily holding data for exchange-traded funds (ETFs), I identify three types of ETFs that adopt distinct approaches to rebalancing their portfolios, which generates meaningful return heterogeneity. First, 56% of ETFs track public indices that pre-announce their rebalances, and they trade entirely on reconstitution days at closing prices. Their large, uninformed trades pay 67 bps in execution costs, a figure that is three times higher than what is paid in similar-sized institutional trades. Second, 7% of ETFs spread out their trades across 10 days and save 34 bps per trade or 7.3 bps per year. Third, 37% of ETFs use self-designed indices to avoid pre-announcements of rebalancing stocks and save 30 bps per trade. The alternative rebalance schedule leads to a tracking error of 10.6 bps per year and an information ratio of 0.69. For a $2 million retirement account that accrues over 30 years, the transaction cost savings rise to $29 thousand at retirement.

Sida Li is a job market candidate from the Department of Finance, University of Illinois at Urbana-Champaign. His research interest spans market microstructure, high-frequency trading, exchange-traded funds (ETFs), and big data. Li's research has been published in journals including in the Journal of Financial Economics and Science, and has been reported by Bloomberg and Financial Times. Li earns his Bachelor's degree in Physics from University of Science and Technology of China.