Beyond Creation and Redemption: Principal Trading by Bond ETFs

Authors

• Alan Guoming Huang, University of WaterlooFollow
• Maureen O'Hara, Cornell University - Samuel Curtis Johnson Graduate School of Management; Cornell University - Cornell SC Johnson College of BusinessFollow
• Jinming Xue, Southern Methodist University (SMU) - Finance DepartmentFollow
• Xing (Alex) Zhou, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

11-17-2025

Abstract

This paper provides the first investigation of ETF direct trading in secondary markets—principal trading—using corporate bond ETFs as the setting. Combining daily holdings with shares outstanding, we infer ETF principal trades and show that they are widespread, occurring on 35% of trading days, more often than creations and redemptions combined. Scaled by corporate-bond assets, principal-trading volume is comparable to primary-market activity. Principal trading complements creations and redemptions: it reduces tracking error for passive ETFs, predicts future bond returns for active ETFs, and contributes 25 basis points annually to active ETFs’ holding-based bond-selection performance.

Document Type

Article

Keywords

Corporate Bond, Principal Trading, Creation and Redemption, Tracking Error, Fund Performance, ETF

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English