The Value of ETF Liquidity

European Finance Association 2020 Helsinki

41 Pages Posted: 6 Apr 2020 Last revised: 5 May 2020

See all articles by Marta Khomyn

Marta Khomyn

University of Technology Sydney (UTS)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: March 26, 2020

Abstract

We model how ETFs compete and set fees. We show that ETF secondary market liquidity plays a key role in determining fees and leads to liquidity clienteles. More liquid ETFs charge higher fees in equilibrium and attract shorter horizon investors that are more sensitive to liquidity than to fees. The higher turnover of these investors sustains the ETF's high liquidity, allowing the ETF to maintain a higher fee and extract a rent. These liquidity rents create a first-mover advantage among ETFs and impact investor welfare. Our empirical tests confirm the presence of liquidity clienteles and show that ETF fee differentials provide a novel measure of the value of liquidity. Our findings resolve the apparent paradox that ETFs with higher fees than their competitors can not only survive, but flourish in equilibrium due to the value of liquidity.

Keywords: ETFs, liquidity, competition, trading volume

JEL Classification: G11, G12, G14

Suggested Citation

Khomyn, Marta and Putnins, Talis J. and Zoican, Marius, The Value of ETF Liquidity (March 26, 2020). European Finance Association 2020 Helsinki. Available at SSRN: https://ssrn.com/abstract=3561531 or http://dx.doi.org/10.2139/ssrn.3561531

Marta Khomyn

University of Technology Sydney (UTS) ( email )

14/28 Ultimo Rd
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Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
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Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

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Riga, LV 1010
Latvia
+371 67015841 (Phone)

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.org

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