As part of the series of the „Finance Research Seminar“, VGSF welcomes Xiao Xiao from Bayes Business School to present her research paper.
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Paper
Decoding the Use of Derivatives in Exchange-traded Funds
joint with Aneel Keswani and Yue Zhang
Using regulatory data from the SEC’s N-PORT filings, this paper studies the use of derivatives and their impact on performance in exchange-traded funds (ETFs). We find that 60% of ETFs trade derivatives, with higher weight and exposure than mutual funds. Derivatives on average contribute positively to ETF returns, especially for active ETFs. Passive ETFs primarily use derivatives to align with their derivative-based benchmarks or to hedge foreign exchange risk. Active ETFs are heavy option users and have hedging motives, while leveraged ETFs mainly use swaps and amplify returns. Flow-performance relation suggests that investors are less sensitive to the performance of passive derivatives users. Contrary to conventional wisdom, active derivatives-ETFs attract more flow when their fees are higher.
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