(Sub)Optimal Asset Allocation to ETFs

47 Pages Posted: 6 Nov 2020

See all articles by David C. Brown

David C. Brown

University of Arizona - Department of Finance

Scott Cederburg

University of Arizona - Department of Finance

Mitch Towner

University of Arizona - Department of Finance

Date Written: September 17, 2020

Abstract

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

Brown, David C. and Cederburg, Scott and Towner, Mitch, (Sub)Optimal Asset Allocation to ETFs (September 17, 2020). Available at SSRN: https://ssrn.com/abstract=3694592 or http://dx.doi.org/10.2139/ssrn.3694592

David C. Brown (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-626-0746 (Phone)

HOME PAGE: http://www.davidclaytonbrown.com

Scott Cederburg

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Mitch Towner

University of Arizona - Department of Finance ( email )

1130 E. Helen Street
Office 315K
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.mitchtowner.com

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