LAUSR

Abstract I examine the extent to which exchange-traded funds’ (ETFs) unusually high overnight returns are distorted by market microstructure effects; specifically, positive order imbalances and overnight increases in bid-ask spreads. Introducing a model that isolates these effects, I show that they artificially increase ETFs’ overnight returns by an average of over 6% annually. I find that the ETF market is prone to these distortions because its rapid growth is accompanied by order imbalances exceeding 10%. I provide detailed intraday statistics on order imbalances and spreads, and an example of an overnight investment strategy selecting ETFs susceptible to overnight biases.