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Exchange-Traded Funds

Author

Listed:
  • Francesco Franzoni

    (Swiss Finance Institute, CH-8006 Zurich, Switzerland)

  • Itzhak Ben-David

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

  • Rabih Moussawi

    (Villanova School of Business, Villanova University, Villanova, Pennsylvania 19085)

Abstract

Over nearly a quarter of a century, exchange-traded funds (ETFs) have become one of the most popular passive investment vehicles among retail and professional investors because of their low transaction costs and high liquidity. By the end of 2016, the market share of ETFs exceeded 10% of the total market capitalization traded on US exchanges, representing more than 30% of overall trading volume. ETFs revolutionized the asset management industry by taking market share from traditional investment vehicles such as mutual funds and index futures. Because ETFs rely on arbitrage activity to synchronize their prices with the prices of the underlying portfolio, trading activity at the ETF level translates to trading of the underlying securities. Researchers have found that although ETFs enhance price discovery, they also inject nonfundamental volatility into market prices and affect the correlation structure of returns. Furthermore, ETFs impact the liquidity of the underlying portfolios, especially during events of market stress.

Suggested Citation

  • Francesco Franzoni & Itzhak Ben-David & Rabih Moussawi, 2017. "Exchange-Traded Funds," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 169-189, November.
    • Handle: RePEc:anr:refeco:v:9:y:2017:p:169-189
    DOI: 10.1146/annurev-financial-110716-032538
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    Citations

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    Cited by:

    1. Nathan Swem, 2017. "Information in Financial Markets : Who Gets It First?," Finance and Economics Discussion Series 2017-023, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    arbitrage; ETFs; fund flows; investment managers; mutual funds; volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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