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The Journal of Index Investing

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S&P ETFs: Arbitrage Opportunities and Market Forecasting

Steven D. Dolvin
The Journal of Beta Investment Strategies Summer 2010, 1 (1) 107-116; DOI: https://doi.org/10.3905/jii.2010.1.1.107
Steven D. Dolvin
is an associate professor of finance at Butler University in Indianapolis, IN.
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  • For correspondence: sdolvin@butler.edu
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Abstract

The article examines the pricing differences between two S&P 500 ETFs (ticker symbols SPY and IVV) and the underlying stock index. The author finds that, on average, both ETFs trade at a premium relative to the S&P 500; however, the level of the daily premium (and, on occasion, discount) varies between the two securities, which creates the opportunity for arbitrage. Since the passage of Regulation NMS in mid-2005, the pricing differences, as expected, have declined, implying that any current/future arbitrage opportunity will be confined to periods of high market volatility, such as 2008. Beyond issues related to arbitrage, the author finds that the relative pricing of the ETFs also provides a valuable signal of future (particularly next day) market activity. Thus, he suggests that active traders and longer-term investors may both benefit from recognition of relative ETF prices.

TOPICS: Exchange-traded funds and applications, mutual funds/passive investing/indexing, wealth management

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The Journal of Index Investing: 1 (1)
The Journal of Beta Investment Strategies
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Summer 2010
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S&P ETFs: Arbitrage Opportunities and Market Forecasting
Steven D. Dolvin
The Journal of Beta Investment Strategies May 2010, 1 (1) 107-116; DOI: 10.3905/jii.2010.1.1.107

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S&P ETFs: Arbitrage Opportunities and Market Forecasting
Steven D. Dolvin
The Journal of Beta Investment Strategies May 2010, 1 (1) 107-116; DOI: 10.3905/jii.2010.1.1.107
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  • Article
    • Abstract
    • S&P 500 EXCHANGE-TRADED FUNDS
    • ARBITRAGE FUNDAMENTALS
    • S&P 500 ETF ARBITRAGE OPPORTUNITIES
    • FORECASTING FUTURE MARKET RETURNS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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