Empirical analysis of ETF intraday trading

Abstract

We investigate the trading of benchmark Exchange traded funds (ETFs), leveraged ETFs, and leveraged inverse ETFs that are matched based on their tracking index or sector. We find that ETF trading is very active and average daily trading volume for the most active ETF is more than $25 billion during the period of March 2007 to December 2009. The daily turnover ratio of leveraged and leveraged inverse ETFs are about four to six times the turnover ratio of the benchmark ETFs on average, and spreads and price volatility of the leveraged and leveraged inverse ETFs are also significantly larger than those of the benchmark ETFs. Trading volume and turnover ratio of all ETFs increased significantly during and after the financial crisis and the active trading is further enhanced when the price movement of benchmark ETFs is large. We also find that small trades dominate trading of all ETFs, and yet they do not play an important role in daily price movements. In addition, we find a U-shaped and an L-shaped intraday pattern for trading volume and return volatility, respectively. These empirical results are important for individual investors, especially those who do not have sophisticated trading experience and lack resources for collecting and processing private information.