Conventional Mutual Index Funds Versus Exchange Traded Funds
32 Pages Posted: 20 Feb 2009 Last revised: 7 Jan 2011
Date Written: February 20, 2009
This paper examines implications of substitutability of two similar investment vehicles: conventional index mutual funds and exchange traded funds (ETFs). It seeks to explain the coexistence of these vehicle types, which offer a claim on the same underlying index return process, but have distinct organizational structures. This study compares aggregate flows into conventional open-end index funds to those into ETFs for various underlying indexes. The study shows that conventional funds and ETFs are substitutes, but not perfect substitutes. Their coexistence can be explained by a clientele effect that segregates the two vehicles into different market niches.
Keywords: ETF, Index Fund, Substitute, Clientele
JEL Classification: G11, G23
Suggested Citation: Suggested Citation