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When passive funds affect prices: evidence from volatility and commodity ETFs

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  • Karamfil Todorov

Abstract

This article studies exchange-traded funds’ (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing, calendar rebalancing, and flow rebalancing, and show that trading against ETFs is risky. Leverage rebalancing has the largest effects on the ETF-related price component. This rebalancing amplifies price changes and exposes ETF counterparties to variance.

Suggested Citation

  • Karamfil Todorov, 2024. "When passive funds affect prices: evidence from volatility and commodity ETFs," Review of Finance, European Finance Association, vol. 28(3), pages 831-863.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:3:p:831-863.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad038
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    More about this item

    Keywords

    ETF; leverage; VIX; futures; commodities;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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