Tracking Error and Pricing Efficiency of Exchange Traded Funds: A Systematic Literature Review

Abstract

Exchange Traded Funds (ETFs) are recently popularized financial instruments. Thus, lack systematic review of previously conducted studies on its two major strands i.e. Tracking Error and Pricing Efficiency. Therefore, this study has been undertaken to synthesize and summarise the findings of existing literature on these subtopics. There by providing concise view of the empirical work conducted over the years. For the purpose of study 57 articles have been reviewed, these articles are specific to the objectives of study and fulfill the quality assessment criteria. Through in-depth study of these articles it becomes comprehensible that ETFs underperform their benchmarks although mixed results have been obtained regarding factors affecting tracking error. Further, in regard to pricing efficiency of ETFs it has been observed that arbitrage opportunity does not last long in developed nations whereas significant persistence was observed in developing nations. It is believed that this systematic literature review (SLR) will be valuable to investors and other market participants specifically arbitrageurs and hedgers. Additionally, it will also pave the way for potential researchers by providing a concise view of available literature.