Competition for Attention in the ETF Space
Charles A. Dice Center Working Paper No. 2021-01
45 Pages Posted: 14 Jan 2021 Last revised: 12 Mar 2021
Date Written: March 9, 2021
Exchange-traded funds (ETFs) are the most prominent financial innovation of the last three decades. Early ETFs offered broad-based portfolios at low cost. As competition became more intense, issuers started offering specialized ETFs that track niche portfolios and charge high fees. Specialized ETFs hold stocks with salient characteristics--high past performance, media exposure, and sentiment--that are appealing to retail and sentiment-driven investors. After their launch, these products perform poorly as the hype around them vanishes, delivering negative risk-adjusted returns. Overall, financial innovation in the ETF space follows two paths: broad-based products that cater to cost-conscious investors and expensive specialized ETFs that compete for the attention of unsophisticated investors.
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