Do ETFs Increase Liquidity?
63 Pages Posted: 17 Mar 2018 Last revised: 22 Apr 2019
Date Written: April 9, 2019
This paper investigates the impact of exchange-traded funds (ETFs) on the liquidity of their underlying stockholdings. Using a difference-in-differences methodology for large changes in the index weights of stocks in the S&P 500 and NASDAQ 100 indexes, we find that increases in ETF ownership decrease the transaction costs of stocks for institutional investors, driven by lower price impact costs. High-ETF ownership stocks have high price resilience and high market depth. However, ETFs are linked to higher liquidation costs during the 2011 U.S. debt-ceiling crisis, suggesting that stocks having high-ETF ownership may experience impaired liquidity during major market stress events.
Keywords: ETFs, Liquidity
JEL Classification: G12, G14
Suggested Citation: Suggested Citation