Exchange Traded Funds (ETFs) are a remarkable example of financial innovation that provides the investors with unique inherent feature of a mutual fund and an ordinary corporate stock. The present study is motivated by the need to examine the performance, index tracking capabilities and pricing efficiency of ETFs. The purpose of the study is to address three objectives: (i) do the ETFs fully replicate the returns of the underlying benchmark; (ii) is there any pricing deviation between trading price and NAV of the respective ETFs studied; and (iii) the magnitude and persistence of premium/discounts in the market. The results of regression show that selected Indian ETFs do not follow full replication strategies and beta estimates deviate from unity with statistically insignificant alpha. Due to imperfect tracking ability of ETFs, there is presence of tracking error with significant magnitude. The difference between market price and NAV of ETF reveals the presence of discount (excess of NAV over market price) and pricing inefficiencies. The premium/discount persists in the market for an average period of three days but exceptional persistence of five days was observed for two ETFs.

Exchange Traded Funds, popularly known as ETFs, are a remarkable evolution in the investment industry and are increasingly challenging the dominance of open-ended mutual funds across the globe. ETFs at their core provide the investors with a basket of securities which can be bought or sold over a stock exchange. All day trading makes the ETFs more flexible than their counterpart’s open-ended mutual funds and can also be sold short or at margin just like a stock. ETFs are different from mutual funds as the ETF units are not sold to the public for cash, instead the Asset Management Company(AMC) that sponsors the ETF (Fund) takes the shares of companies comprising the index from various categories of investors like authorized participants, large investors and institutions. In turn, it issues them a large block of ETF units. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the exchange. They offer investors various benefits such as risk diversification, flexibility, transparency and real-time trading.

Applied Finance Journal, Exchange Traded Funds (ETFs), Asset Management Company(AMC), Standard and Poor’s Depository Receipts (SPDRs), Qubes (QQQ), Pricing Efficiency, Exchange Traded Funds, India.