The share price of an ETF doesn’t always perfectly track the value of the securities or assets held in the underlying portfolio. These fluctuations to net asset value are known as premiums and discounts.
However, Morningstar believes that premiums can be predicted and capitalized upon through patient trading.
According to a recent Morningstar research paper, daily changes in ETF premiums show a positive relationship to simultaneous and lagged movements in the equity market, equity market volatility, and equity market liquidity.
“A larger change in one variable today tends to coincide with a larger change to an ETF’s premium both tomorrow and the day after,” Morningstar said.
The findings were based on a hypothetical model with a nine category-specific, value-weighted long-short portfolios composed of U.S. equity ETFs.
“Furthermore, active ETF trading strategies can be created using these relationships as indicators to generate abnormal returns before transaction costs,” the researchers added.