Competition for Attention in the ETF Space
Charles A. Dice Center Working Paper No. 2021-01
80 Pages Posted: 14 Jan 2021 Last revised: 5 Jan 2022
Date Written: December 30, 2021
The interplay between investors' demand and providers' incentives has shaped the evolution of exchange-traded funds (ETFs). While early ETFs offered diversification at low cost, later ETFs track niche portfolios and charge high fees. Strikingly, over their first five years, specialized ETFs lose about 30% in risk-adjusted terms. This underperformance cannot be explained by high fees or hedging demand. Rather, it is driven by the overvaluation of the underlying stocks. Overall, providers appear to cater 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