The Value of ETF Liquidity

European Finance Association 2020 Helsinki

74 Pages Posted: 6 Apr 2020 Last revised: 30 Jan 2024

See all articles by Marta Khomyn

Marta Khomyn

University of Adelaide

Tālis J. Putniņš

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

Marius Zoican

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

Date Written: January 29, 2024

Abstract

We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF's high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs can not only survive, but flourish in equilibrium.

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 (January 29, 2024). 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 Adelaide ( email )

University of Adelaide Bdg 10 Pulteney St, Level 9
Adelaide, 5000
Australia
0481314349 (Phone)

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

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

Digital Finance CRC ( email )

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
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.com

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