Dominated ETFs *
forthcoming at Critical Finance Review
68 Pages Posted: 6 Nov 2020 Last revised: 6 Aug 2024
Date Written: August 1, 2024
Abstract
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