Download This PaperCompetition for Attention in the ETF Space
Fisher College of Business Working Paper No. 2021-03-001
Charles A. Dice Center Working Paper No. 2021-01
Swiss Finance Institute Research Paper No. 21-03
Review of Financial Studies, forthcoming
80 Pages Posted: 14 Jan 2021 Last revised: 6 Oct 2022
There are 3 versions of this paper
Competition for Attention in the ETF Space
Competition for Attention in the ETF Space
Competition for Attention in the ETF Space
Date Written: October 3, 2022
Abstract
The interplay between investors’ demand and providers’ incentives has shaped the evolution of exchange-traded funds (ETFs). While early ETFs invested in broad-based indexes and therefore offered diversification at low cost, more recent products track niche portfolios and charge high fees. Strikingly, over their first 5 years, specialized ETFs lose about 30% (risk-adjusted). This underperformance cannot be explained by high fees or hedging demand. Rather, it is driven by the overvaluation of the underlying stocks at the time of the launch. Our results are consistent with providers catering to investors’ extrapolative beliefs by issuing specialized ETFs that track attention grabbing themes.
Keywords: exchange-traded funds, ETFs, financial innovation, competition, attention, retail investors, trading, securities, mutual funds, financial intermediation, overvaluation
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation
Itzhak Ben-David (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
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Swiss Finance Institute ( email )
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Byungwook Kim
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States