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The effect of ETFs on financial markets: a literature review

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  • Luca J. Liebi

    (Swiss Institute of Banking and Finance, University of St. Gallen)

Abstract

Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs, are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review provides a broad overview of recent academic studies analyzing the effect of ETFs on liquidity, price discovery, volatility, and comovement of the underlying securities.

Suggested Citation

  • Luca J. Liebi, 2020. "The effect of ETFs on financial markets: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 165-178, June.
    • Handle: RePEc:kap:fmktpm:v:34:y:2020:i:2:d:10.1007_s11408-020-00349-1
    DOI: 10.1007/s11408-020-00349-1
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    References listed on IDEAS

    as
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    3. Wu, Chunying & Xiong, Xiong & Gao, Ya, 2021. "Performance comparisons between ETFs and traditional index funds: Evidence from China," Finance Research Letters, Elsevier, vol. 40(C).

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    More about this item

    Keywords

    Exchange-traded funds; Liquidity; Price discovery; Volatility; Comovement;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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