ETFs, Anomalies and Market Efficiency

70 Pages Posted: 4 Apr 2022 Last revised: 2 Apr 2025

See all articles by Ilias Filippou

Ilias Filippou

Florida State University

Songrun He

Washington University in St. Louis - John M. Olin Business School

Sophia Zhengzi Li

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: October 18, 2023

Abstract

This paper investigates the role of exchange-traded fund (ETF) ownership in enhancing market efficiency, drawing on a comprehensive set of over 200 return anomalies in the U.S. equity market. Controlling for key confounding factors such as short-selling constraints, arbitrage costs, and information environments, we find that higher ETF ownership is associated with reduced mispricing and lower anomaly-based returns. Using Russell index reconstitution as a natural experiment, we provide additional causal evidence of ETF ownership attenuating anomaly profits. The mitigating effect of ETF ownership on mispricing is primarily driven by active ETFs and is more pronounced for build-up anomalies than for resolution anomalies. Further analyses reveal that ETFs attenuate mispricing by facilitating both ex-ante information acquisition and ex-post information incorporation. Overall, our findings suggest that ETFs contribute to improved market efficiency by reducing mispricing arising from a broad range of anomalies. 

Keywords: ETFs, ETF ownership, Anomalies, Market Efficiency

JEL Classification: G11, G12, G14, G23

Suggested Citation

Filippou, Ilias and He, Songrun and Li, Sophia Zhengzi and Zhou, Guofu, ETFs, Anomalies and Market Efficiency (October 18, 2023). Available at SSRN: https://ssrn.com/abstract=4056260 or http://dx.doi.org/10.2139/ssrn.4056260

Ilias Filippou

Florida State University ( email )

Tallahasse, FL 32306
United States

Songrun He

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sophia Zhengzi Li

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100 Rockafeller Rd
Piscataway, NJ 08854
United States

HOME PAGE: http://https://sites.google.com/site/szlwebpage/

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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