Exchange-traded commodities (ETCs) open the commodity markets to both private and institutional investors. This paper is the first to examine the pricing efficiency and potential determinants of price deviations of this new class of derivatives based on daily data of 237 ETCs traded on the German market from 2006 to 2012. Given the unique size of the sample, we employ the premium/discount analysis, quadratic and linear pricing methods, as well as regression models. We find that the ETCs incur, on average, price deviations in their daily trading and are more likely to trade at a premium from their net asset values than at a discount. In addition, we examine the influence of certain factors such as management fees, commodity sectors, issuers, spread, assets under management, investment strategies, replication and collateralization methods on quadratic and linear price deviations.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
The acronym UCITS stands for “Undertakings for Collective Investment in Transferable Securities” directive and is the regulatory framework for an investment vehicle that can be marketed across the European Union.
Besides a stock market trading, over-the-counter (OTC) trading may also be possible.
Thus, the APs operate as an important link between the secondary and primary market from which retail investors are usually excluded. The settlement by an independent clearing and settlement organization takes place on a normal \(T+2\) or \(T+3\) basis. In summary, a clear distinction between the primary and the secondary market including its market participants is crucial for a correct understanding of the whole ETC structure.
The above given information are provided by the German stock exchange “Deutsche Börse AG”.
We use log returns instead of simple returns which are also widespread in the context of passive financial instruments in the academic literature and in practice, as the reliance on continuously compounded returns is more valid and suitable in the context of our further statistical computations.
In our framework, it would be necessary to aggregate \(\alpha \), \(\beta \) and standard errors into one deviation measure. Since there is no straight forward way to do this, we used the more proven concepts defined above.
Brokerage commissions, market fees, clearing and settlement costs as well as taxes and stamp duties are examples of direct or explicit trading costs (see D’Hondt and Giraud 2008).
See Ramaswamy (2011) for further information.
The independent variable ’Issuer 3’ was excluded from the model for it is identical to the variable ’no collateralization’.
Aber JW, Li D, Can L (2009) Price volatility and tracking ability of ETFs. J Asset Manag 10(4):210–221
Amihud Y, Mendelson H (1991) Liquidity, asset prices and financial policy. Financ Anal J 47(6):56–66
Ammann M, Tobler J (2000) Measurement and decomposition of tracking error variance. Discussion paper no 2000-11
Anson MJ (1999) Maximizing utility with commodity futures diversification. J Portf Manag 25(4):86–94
Anson MJ, Fabozzi FJ, Jones FJ (2011) The handbook of traditional and alternative investment vehicles: investment characteristics and strategies. Wiley, Hoboken
Aroskar R, Ogden WA (2012) An analysis of exchange traded notes tracking errors with their underlying indexes and indicative values. Appl Financ Econ 22(24):2047–2062
Belousova J, Dorfleitner G (2012) On the diversification benefits of commodities from the perspective of euro investors. J Bank Finance 36(9):2455–2472
Bienkowski N (2007) Exchange traded commodities: led by gold, ETCs opened the world of commodities to investors. Alchem Lond Bullion Mark Assoc 48:6–8
Bienkowski N (2010) Oil futures, exchange-traded commodities and the oil futures curve. J Indexes 13(3):40–43
Bodie Z (1983) Commodity futures as a hedge against inflation. J Portf Manag 9(3):12–17
Borsa Italiana (2009) A new way of investing in commodities: ETC—exchange traded commodities. Borsa Italiana Publications
Brooks N (2008) Exchange traded commodities: commodity investing goes mainstream. Alchem Lond Bullion Mark Assoc 51:7–9
Buetow GW, Henderson BJ (2012) An empirical analysis of exchange-traded funds. J Portf Manag 38(4):112–127
Charupat N, Miu P (2011) The pricing and performance of leveraged exchange-traded funds. J Bank Finance 35(4):966–977
Chen AH, Kensinger JW (1990) An analysis of market-index certificates of deposit. J Financ Serv Res 4(2):93–110
Chu PKK (2011) Study on the tracking errors and their determinants: evidence from Hong Kong exchange traded funds. Appl Financ Econ 21(5):309–315
Delcoure N, Zhong M (2007) On the premiums of iShares. J Empir Finance 14(2):168–195
Deville L (2008) Exchange traded funds: history, trading, and research. In: Zopounidis C, Doumpos M, Pardalos P (eds) Handbook of financial engineering. Springer, New York, pp 67–98
D’Hondt C, Giraud JR (2008) Transaction cost analysis A-Z: a step towards best execution in the post-MiFID landscape. EDHEC Publications, Paris
Diavatopoulos D, Felton J, Wright C (2011) The indicative value-price puzzle in ETNs: liquidity constraints, information signaling, or an ineffective system for share creation? J Invest 20(3):25–39
Elton EJ, Gruber MJ, Comer G, Li K (2002) Spiders: where are the bugs? J Bus 75(3):453–472
Engelke L, Yuen JC (2008) Types of commodity investments. In: Fabozzi FJ, Füss R, Kaiser DG (eds) The handbook of commodity investing. Wiley, Hoboken, pp 549–569
Engle RF, Sarkar D (2006) Premiums-discounts and exchange traded funds. J Deriv 13(4):27–45
ETFS Commodity Securities Limited (2016) Prospectus for the issue of ETFS classic commodity securities. Jersey
ETFS Metal Securities Ltd (2016) Prospectus for the issue of ETFS metal securities. Jersey
Fabozzi FJ, Füss R, Kaiser DG (2008) A primer on commodity investing. In: Fabozzi FJ, Füss FR, Kaiser DG (eds) The handbook of commodity investing. Wiley, Hoboken, pp 3–37
Fassas AP (2014) Tracking ability of ETFs: physical versus synthetic replication. Index Invest 5(2):9–20
Frino A, Gallagher DR (2002) Is index performance achievable? An analysis of Australian equity index funds. Abacus 38(2):200–214
Gallagher DR, Segara R (2006) The performance and trading characteristics of exchange-traded funds. J Invest Strategy 1(2):49–60
Gastineau GL (2001) Exchange traded funds: an introduction. J Portf Manag 27(3):88–96
Gastineau GL (2010) The exchange-traded funds manual, 2nd edn. Wiley, Hoboken
Gharakhani M, Fazlelahi FZ, Sadjadi SJ (2014) A robust optimization approach for index tracking problem. J Comput Sci 10(12):2450–2463
Gorton G, Rouwenhorst KG (2006) Facts and fantasies about commodity futures. Financ Anal J 62(2):47–68
Gruber MJ (1996) Another puzzle: the growth in actively managed mutual funds. J Finance 51(3):783–810
Grünbichler A, Wohlwend H (2005) The valuation of structured products: empirical findings for the Swiss market. Financ Mark Portf Manag 19(4):361–380
Guo K, Leung T (2015) Understanding the tracking errors of commodity leveraged ETFs. In: Aïd R, Ludkovski M, Sircar R (eds) Commodities, energy and environmental finance. Springer, New York, pp 39–63
Jares TB, Lavin AM (2004) Japan and Hong Kong exchange-traded funds (ETFs): discounts, returns, and trading strategies. J Financ Serv Res 25(1):57–69
Jensen MC (1967) The performance of mutual funds in the period 1945–1964. J Finance 23(2):389–416
Johnson WF (2009) Tracking errors of exchange traded funds. J Asset Manag 10(4):253–262
Kayali MM, Ozkan N (2012) Does the market misprice real sector ETFs in Turkey? Int Res J Finance Econ 91:156–160
Kostovetsky L (2003) Index mutual funds and exchange-traded funds. J Portf Manag 29(4):80–92
Lan S, Mercado S, Levitt S (2013) 2012 ETF review & 2013 outlook: record inflows drive global ETP assets to near $2 trillion. Deutsche Bank Markets Research
Lang SE (2009) Exchange traded funds—Erfolgsgeschichte und Zukunftsaussichten. WiKu, Duisburg (i.a.)
Lehmann BN, Modest DM (1987) Mutual fund performance evaluation: a comparison of benchmarks and benchmark comparisons. J Finance 42(2):233–265
Leung T, Ward B (2015) The golden target: analyzing the tracking performance of leveraged gold ETFs. Stud Econ Finance 32(3):278–297
Lin A, Chou A (2006) The tracking error and premium/discount of Taiwan’s first exchange traded fund. Web J Chin Manag Rev 9(3):1–21
Malkiel BG (1995) Returns from investing in equity mutual funds 1971 to 1991. J Finance 50(2):549–572
Mankiewicz C (2009) Aktives vs. passives Management von Commodity/Investments—Sind passive Indexinvestments der geeignete Ansatz für Pensionskassen? e-J Pract Bus Res, Sonderausgabe Performance (01/2009), pp 1–26
Muck M (2006) Where should you buy your options? The pricing of exchange-traded certificates and OTC derivatives in Germany. J Deriv 14(1):82–96
Plante JF, Roberge M (2007) The passive approach to commodity investing. J Financ Plan 37(4):66–75
Ramaswamy S (2011) Market structures and systemic risks of exchange-traded funds. BIS working paper no 343, pp 1–17
Roll R (1992) A mean/variance analysis of tracking error. J Portf Manag 18(4):13–22
Rompotis GG (2008) Performance and trading characteristics of German passively managed ETFs. Int Res J Finance Econ 15:218–231
Rompotis GG (2011a) Active vs passive management: new evidence from exchange traded funds. Int Rev Appl Financ Issues Econ 3(1):169–186
Rompotis GG (2011b) Predictable patterns in ETFs’ return and tracking error. Stud Econ Finance 28(1):14–35
Rudolf M, Wolter HJ, Zimmermann H (1999) A linear model for tracking error minimization. J Bank Finance 23(1):85–103
Schmidhammer C, Lobe S, Röder K (2010) Intraday pricing of ETFs and certificates replicating the German DAX index. Rev Manag Sci 5(4):337–351
Shin S, Soydemir G (2010) Exchange-traded funds, persistence in tracking errors and information dissemination. J Multinatl Financ Manag 20(4/5):214–234
Stoimenov PA, Wilkens S (2005) Are structured products ‘fairly’ priced? An analysis of the German market for equity-linked instruments. J Bank Finance 29(12):2971–2993
Stoll HR, Whaley RE (2010) Commodity index investing and commodity futures prices. J Appl Finance 20(1):7–46
Tzvetkova R (2005) The implementation of exchange traded funds in the European market. Difo-Druck, Bamberg
Wallmeier M, Diethelm M (2009) Market pricing of exotic structured products: the case of multi-asset barrier reverse convertibles in switzerland. J Deriv 17(2):59–72
Welch BL (1951) On the comparison of several mean values: an alternative approach. Biometrika 38(3/4):330–336
White H (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48(4):817–838
Wilkens S, Erner C, Röder K (2003) The pricing of structured products in Germany. J Deriv 11(1):55–69
Wright C, Diavatopoulos D, Felton J (2010) Exchange-traded notes: an introduction. J Invest 19(2):27–37
About this article
Cite this article
Dorfleitner, G., Gerl, A. & Gerer, J. The pricing efficiency of exchange-traded commodities. Rev Manag Sci 12, 255–284 (2018). https://doi.org/10.1007/s11846-016-0221-0
- Exchange-traded commodities
- Financial innovation
- Pricing efficiency
Mathematics Subject Classification