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Exchange Traded Funds (ETFs)

Annual Review of Financial Economics, Volume 9, 2017, Forthcoming

Charles A. Dice Center Working Paper No. 2016-22

Fisher College of Business Working Paper No. 2016-03-022

Swiss Finance Institute Research Paper No. 16-64

35 Pages Posted: 8 Nov 2016 Last revised: 16 Sep 2017

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: August 2017

Abstract

Over nearly a quarter of a century, ETFs have become one of the most popular passive investment vehicles among retail and professional investors due to their low transaction costs and high liquidity. By the end of 2016, the market share of ETFs topped over 10% of the total market capitalization traded on US exchanges, while representing more than 30% of the overall trading volume. ETFs revolutionized the asset management industry by taking market share from traditional investment vehicles such as mutual funds and index futures. Because ETFs rely on arbitrage activity to synchronize their prices with the prices of the underlying portfolio, trading activity at the ETF level translates to trading of the underlying securities. Researchers found that while ETFs enhance price discovery, they also inject non-fundamental volatility to market prices and affect the correlation structure of returns. Furthermore, ETFs impact the liquidity of the underlying portfolios, especially during events of market stress.

Keywords: ETFs, Mutual Funds, Investment Managers, Volatility, Arbitrage, Fund Flows

JEL Classification: G12, G14, G15

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Exchange Traded Funds (ETFs) (August 2017). Annual Review of Financial Economics, Volume 9, 2017, Forthcoming; Charles A. Dice Center Working Paper No. 2016-22; Fisher College of Business Working Paper No. 2016-03-022; Swiss Finance Institute Research Paper No. 16-64. Available at SSRN: https://ssrn.com/abstract=2865734

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Francesco Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 1003
Villanova, PA 19085
United States

University of Pennsylvania - The Wharton School ( email )

United States

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