Dominated ETFs *

forthcoming at Critical Finance Review

68 Pages Posted: 6 Nov 2020 Last revised: 6 Aug 2024

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: 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

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

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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