Is Competition Beneficial? The Case of Exchange Traded Funds

39 Pages Posted: 12 May 2021 Last revised: 24 May 2021

See all articles by Celine Kharma

Celine Kharma

University of St. Gallen - School of Finance

Nicolas Eugster

University of Queensland - Business School

Date Written: March 21, 2021

Abstract

New ETF creation has surged in recent years, giving investors the option to choose from a wide range of similar ETFs within each group of competitors. We identify groups of ETFs that can be considered direct competitors and examine the impact of competition on their market quality. Results show improved market quality measures when competition increases. A change equivalent to going from a monopoly to a highly competitive market results in a 29% decrease in bid-ask spreads, a 72% decrease in illiquidity, and a 52% increase in turnover. However, we find that competition has a differential impact on ETFs according to their market depth. Market quality improves with competition for large or well-performing ETFs, while it worsens for small or under-performing ETFs. A case study on ETFs banned by the SEC in March 2010 further highlights our results in the artificially controlled competitive environment of the moratorium.

Keywords: ETFs, competition, market quality, market microstructure

JEL Classification: D40, D53, G14, G23, L11, L25

Suggested Citation

Kharma, Celine and Eugster, Nicolas, Is Competition Beneficial? The Case of Exchange Traded Funds (March 21, 2021). International Review of Financial Analysis, 2021, Vol. 76, 101789, https://doi.org/10.1016/j.irfa.2021.101789., Available at SSRN: https://ssrn.com/abstract=3832400

Celine Kharma

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Nicolas Eugster (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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