ETF Competition and Market Quality

57 Pages Posted: 25 Jan 2016 Last revised: 9 Aug 2017

See all articles by Travis Box

Travis Box

University of Mississippi - Department of Finance

Ryan Davis

University of Alabama at Birmingham

Kathleen P. Fuller

University of Mississippi - School of Business Administration

Date Written: August 1, 2017

Abstract

This paper examines competition between ETFs that hold nearly identical portfolios of securities. We provide evidence that incumbent-fund liquidity is negatively affected when a new ETF is added to an asset class. The degradation in liquidity is even more severe whenever both funds follow the same benchmark. We also document a decline in primary-market activity for the incumbent ETFs after the arrival of new competitors. Furthermore, increasing the number of funds in an asset class does not put downward pressure on fund management fees. Thus, the deterioration in market quality is not offset by decreasing costs of fund ownership.

Keywords: ETFs, management fees, fund flows, market quality, liquidity

JEL Classification: D40, D53, G14, G23, L11, L25

Suggested Citation

Box, Travis and Davis, Ryan and Petrie Fuller, Kathleen, ETF Competition and Market Quality (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=2721813 or http://dx.doi.org/10.2139/ssrn.2721813

Travis Box (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

Ryan Davis

University of Alabama at Birmingham ( email )

Birmingham, AL 35294
United States

Kathleen Petrie Fuller

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

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