Abstract
We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs can not only survive, but flourish in equilibrium.
Marius Zoican
Associate Professor of Finance
I study the impact of (new) technology on securities exchanges and asset management, as well as how to leverage technological innovations to build a better market.