(Sub)Optimal Asset Allocation to ETFs
47 Pages Posted: 6 Nov 2020
Date Written: September 17, 2020
We study the allocation of capital to U.S. equity exchange-traded funds (ETFs). Investors tend to invest more in ETFs with lower fees and higher liquidity, consistent with common intuition. We also find, however, that investors make substantial allocations to ETFs that are similar to existing ETFs while incurring the costs of higher fees and lower liquidity. We estimate the aggregate cost to ETF investors from investing in dominated funds to be $1.1 billion to $17.5 billion since 2000 depending on the bench-marking approach. We conclude that ETF investors may be better off, as a whole, by concentrating on a relatively small set of low-fee, high-liquidity funds.
Keywords: Exchange Traded Funds (ETFs), Dominated Products, Bench-marking, Smart Beta
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation