The Value of ETF Liquidity

European Finance Association 2020 Helsinki

55 Pages Posted: 6 Apr 2020 Last revised: 18 Aug 2021

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: August 18, 2021

Abstract

We model same-index ETF competition. Heterogeneity in investor horizons allows ETFs to
build liquidity clienteles, leading to fee differentials. More liquid ETFs charge higher fees
in equilibrium, attracting short-horizon investors who are more sensitive to liquidity than to
fees. Higher turnover from short-horizon investors sustains the ETF’s high liquidity. Liquidity
segmentation generates ETF rents and reduces welfare. Empirically, we confirm the presence of
liquidity clienteles and argue that ETF fee differentials provide a novel measure for the value of
liquidity. Our findings resolve the apparent paradox that ETFs charging relatively higher fees
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 (August 18, 2021). 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
Sydney, Ultimo 2007
Australia
+61481314349 (Phone)

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

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

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.org

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