Index Providers: Whales Behind the Scenes of ETFs
60 Pages Posted: 1 Jun 2021 Last revised: 19 Aug 2022
Date Written: July 30, 2021
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: Suggested Citation