Competition for Attention in the ETF Space

80 Pages Posted: 14 Jan 2021 Last revised: 5 Jan 2022

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Byungwook Kim

Ohio State University (OSU) - Department of Finance

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Multiple version iconThere are 3 versions of this paper

Date Written: December 30, 2021

Abstract

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

Ben-David, Itzhak and Franzoni, Francesco A. and Kim, Byungwook and Moussawi, Rabih, Competition for Attention in the ETF Space (December 30, 2021). 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, Available at SSRN: https://ssrn.com/abstract=3765063 or http://dx.doi.org/10.2139/ssrn.3765063

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
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Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Byungwook Kim

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

HOME PAGE: http://www.rabihmoussawi.com/

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