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Index providers: Whales behind the scenes of ETFs

Author

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  • An, Yu
  • Benetton, Matteo
  • Song, Yang

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 expense ratios by up to 30%.

Suggested Citation

  • An, Yu & Benetton, Matteo & Song, Yang, 2023. "Index providers: Whales behind the scenes of ETFs," Journal of Financial Economics, Elsevier, vol. 149(3), pages 407-433.
    • Handle: RePEc:eee:jfinec:v:149:y:2023:i:3:p:407-433
    DOI: 10.1016/j.jfineco.2023.06.003
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    More about this item

    Keywords

    ETF; Index provider; Licensing fee; Expense ratio; Competition;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G5 - Financial Economics - - Household Finance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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