ETF Competition and Market Quality
57 Pages Posted: 25 Jan 2016 Last revised: 9 Aug 2017
Date Written: August 1, 2017
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: Suggested Citation