Dominated ETFs

59 Pages Posted: 6 Nov 2020 Last revised: 24 Mar 2021

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: March 24, 2021

Abstract

We study dominated products in the market for U.S. equity exchange-traded funds (ETFs). We identify a large number of dominated ETFs with returns that are highly correlated with those of cheaper, more liquid competitors. Counterintuitively, these dominated ETFs attract excess capital relative to expectations based on fund characteristics related to fees, liquidity, performance, strategy uniqueness, and investor awareness. We estimate the aggregate cost to investors from allocating capital to dominated ETFs to be \$1.0 billion to \$6.7 billion from 2000 to 2018. These costs are growing over time as newly listed ETFs claim unique strategies despite high correlations with cheaper ETFs.

Keywords: Exchange Traded Funds (ETFs), Dominated Products, Smart Beta

JEL Classification: G11, G12, G23

Suggested Citation

Brown, David C. and Cederburg, Scott and Towner, Mitch, Dominated ETFs (March 24, 2021). 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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