{"id":17212,"date":"2022-02-10T16:36:59","date_gmt":"2022-02-10T15:36:59","guid":{"rendered":"https:\/\/quantpedia.com\/?p=17212"},"modified":"2025-06-04T14:17:43","modified_gmt":"2025-06-04T12:17:43","slug":"how-to-utilize-anticipated-etf-rebalances","status":"publish","type":"post","link":"https:\/\/vvv.quantpedia.com\/es\/how-to-utilize-anticipated-etf-rebalances\/","title":{"rendered":"How to Utilize Anticipated ETF Rebalances"},"content":{"rendered":"

Passive investing enjoys substantial popularity and subsequently attracts the attention of researchers. We blogged about the boom of <\/strong>passive investing and market inelasticity<\/strong><\/a> in the past. However, the novel research by Li (2021) examines a different perspective. With the boom of passive investing, we are also witnessing a boom of index-tracking mutual funds, but especially index-tracking ETFs. <\/strong><\/p>\n\n\n\n

For many investors, passive investing can be a no-brainer<\/a> and is suggested by many, especially those who think that the walk is random. However, it does not mean that the passive investors do not trade – the ETFs trade instead of them. The indexes that are being tracked are rebalanced to account for changes in the market cap, mergers, delistings, or IPOs. The novel research shows that it matters how the ETFs trade. The author recognizes three possible rebalancing strategies: sunshine trading, camouflaging when to trade, and camouflaging what to trade. In the first case, the ETFs track publicly available indexes that announce<\/strong> changes five days before rebalances. These ETFs react to the changes by adding or dropping stocks only on the close of index rebalancing days. Although transparent, it is costly because the stock prices tend to rise by 67 bps on average prior to rebalancing day. The second option is to camouflage when to trade, which perhaps allows more optimal trading that outperforms sunshine ETFs by 7.3 bps per year. The last option is to hide what to trade, in which case the ETFs are self-indexed and do not track public indexes. Consequently, ETFs are less transparent but more efficient. According to the research, costs to rebalance are 30 bps lower per trade for self-indexed ETFs compared to those tracking public indexes. <\/strong><\/p>\n\n\n\n

So what about the key takeaways? The passive investors “trade,” and it does matter how. Even though the differences are not that big, for a long-term horizon, the differences compound. For active traders, the paper shows that the rebalancing of the ETFs could be utilized by trading in advance. <\/strong><\/p>\n\n\n

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