Dominated ETFs *

Within the growing market for exchange-traded funds (ETFs), we identify many dominated ETFs with returns that are highly correlated with those of cheaper, more liquid competitors. Both retail and institutional investors overallocate to dominated funds with non-index strategies. We estimate the aggregate excess fees paid by investors to dominated U.S. equity ETFs to be $4.7 billion from 2000 to 2018. This cost is growing over time as newly listed ETFs claim unique strategies despite high correlations with cheap, well-established index ETFs. Dominated ETFs survive and thrive even without advisor incentive misalignments, suggesting limitations on the potential benefits of expanding fiduciary standards.

Keywords: Exchange Traded Funds (ETFs), Dominated Products, Incentive Alignment JEL Classification Numbers: D53, G11, G12, G23

JEL Classification: G11, G12, G23

Suggested Citation: Suggested Citation

Brown, David C. and Cederburg, Scott and Towner, Mitch, Dominated ETFs * (August 1, 2024). forthcoming at Critical Finance Review, Available at SSRN: https://ssrn.com/abstract=3694592 or http://dx.doi.org/10.2139/ssrn.3694592