Index Providers: Whales Behind the Scenes of ETFs

60 Pages Posted: 1 Jun 2021 Last revised: 19 Aug 2022

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Matteo Benetton

University of California, Berkeley - Haas School of Business; Centre for Economic Policy Research (CEPR)

Yang Song

University of Washington - Michael G. Foster School of Business

Date Written: July 30, 2021

Abstract

Most ETFs replicate indexes licensed by index providers. We show that index providers wield strong market power and charge large markups to ETFs that are passed on to investors. We document three stylized facts: (i) the index provider market is highly concentrated; (ii) investors care about the identities of index providers, although they explain little variation in ETF returns; and (iii) over one-third of ETF expense ratios are paid as licensing fees to index providers. A structural decomposition attributes 60% of licensing fees to index providers’ markups. Counterfactual analyses show that improving competition among index providers reduces ETF fees by up to 30%.

Keywords: Index providers, market power, ETFs

JEL Classification: G10, G20

Suggested Citation

An, Yu and Benetton, Matteo and Song, Yang, Index Providers: Whales Behind the Scenes of ETFs (July 30, 2021). Available at SSRN: https://ssrn.com/abstract=3855836 or http://dx.doi.org/10.2139/ssrn.3855836

Yu An

Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Matteo Benetton

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Yang Song (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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