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Morningstar Examines ETF Premiums

A recent Morningstar paper found that changes to ETF premiums could be predicted with a good degree of accuracy.  In addition, because of a strong relationship to movements in the equity market, including volatility and liquidity, active ETF trading strategies can be created to generate abnormal returns before transaction costs.  The research also found that being able to anticipate when inefficiencies in ETFs’ pricing occur could benefit an investor in trade execution.  The conclusions of the paper suggest that investors should seek to trade ETFs intelligently and patiently using information readily available today in order to avoid transacting at unfavorable prices tomorrow.