Does the law of one price apply to dually listed ETFs belonging to the same family? Evidence from iShares

Abstract

According to the law of one price, two identical securities traded in different places at the same time should command the same price. This law is expected to strongly hold when the identical securities also belong to the same investment family. In this article, we examine whether the law of one price applies to dually listed securities belonging to the same family. In particular, we use a sample of 12 pairs of the UK and US ETFs managed by the same family (the Blackrock) and tracking the same stock index in the period 2002–2011 so as to investigate whether there are any differences in key institutional characteristics, such as assets under management, expense ratio, return, risk and tracking ability. The results indicate significant differences in assets, expenses, performance and risk profile but not in the tracking efficiency between the UK and US ETFs. The results also indicate that the performance of the UK ETFs is independent to the performance of the US counterparts. On the basis of the findings, we may conclude that dual or multiple offerings originated in countries with differences in institutional framework, currencies and time zones are likely to differ despite them being offered and managed by the same firm. Therefore, the assumption about the one price is rejected and, thus, multiple offerings of ETFs are expected to co-exist.