1976 John Bogle the Vanguard Group founder launched the world’s first index mutual fund and 26 years later, in 1993 the first ETF is issued. According to ICI(Investment Company Institute), total net assets in index funds reached $8.4 trillion, with half in index mutual funds and half in index ETFs.

This is to collect all relevant materials for me to identify and hopefully conclude what arbitrage opportunities there are due to growing passive/index investments in market”.

The major source is scholar.google.com.

1. Identifying the Effect of Stock Indexing: Impetus or Impediment to Arbitrage and Price Discovery? Although index investing has no discernible effect on the ability of arbitrageurs to trade and impound news into the prices of large- and mid-cap stocks, we find that index investing increases the speed of price adjustment to news for micro-cap stocks. It uses Regression Discontinuity Design, a way of estimating treatment effects in a nonexperimental setting where treatment is determined by whether an observed “assignment” variable (also referred to in the literature as the “forcing” variable or the “running” variable) exceeds a known cutoff point.
2. Exchange-Traded Funds Ownership and Stock Volatility by Byoungho Choi etc. There is liquidity trading hypothesis, which is explained by the paper as “Since the price and the net asset value of the ETF underlying stocks are tied by arbitrage, liquidity shocks to the ETFs may propagate to the underlying stocks through arbitrage trading”. Liquidity trading is associated to “liquidity value”, say, once a stock in included into “S&P 500”, even there isn’t any change on the fundamental profile of the company, value/price of the stock should be adjusted upward. Hence, I think for hedge fund quants, it’s absolutely necessary to add this “liquidity factor” based on index in/exclusion. Arbitrage trading can cause unintended consequences, such as increased volatility or a decrease in trading liquidity, irrelevant to the value of assets constituting the basket. The conclusion is the growth of the ETFs in the Korean stock market may have had an unintended consequence of the higher volatility of ETF underlying stocks.
3. How efficient is the pricing of ETFs? : Comparing the pricing of ETFs with the pricing of the underlying stocks and the index by LUT university. statistically significant mispricing is present among the selected ETFs, although the average price of the ETFs follow closely to the respective NAV. Autoregression suggest that the mispricing is persistent for at least two days which exposes the ETFs for arbitrage opportunities, but the magnitude of mispricing is a barrier for arbitrage, because the bid-ask spread widens. ETFs are efficiently priced, but ETFs are not replicating their respective indexes perfectly and exhibit significant tracking errors.
4. Artificial Intelligence-Driven Systems for Financial Forecasting by STANCIU, MARIA MADALINA. this dissertation introduces machine learning approaches based on explainable Artificial Intelligence techniques that are integrated into a financial forecasting and trading pipeline. Specifically, there are presented three strategies for excluding irrelevant features for the prediction task, with the goal being to increase the prediction performance not only at the stock level but also globally, at the stock-set level. It demonstrate the utility of the proposed approaches, their performance is evaluated in real-world scenarios, i.e., historical data of stocks composing the S&P500 index or custom stock-set combining various other indexes.