Reading Tomorrow’s Newspaper: Predictability in ETF Returns

Abstract

We study the persistence of ETF premiums and discounts. Following a day of high or low premiums, or premiums or discounts over NAV, ETFs tend to maintain a premium or discount for as many as five days, though there is some regression to the mean. Premiums also predict distinct patterns of returns on the following day. Overnight prices drop following a high premium, but high-premium ETFs have significantly higher returns the next day. Surprisingly, the NAV returns over the next day also tend to be positive. Discounts show a similar but opposite pattern, with smaller magnitudes. We conclude that ETF premiums and discounts have some ability to predict future returns, including the fundamental returns of the underlying assets.