DP15762 Competition for Attention in the ETF Space

Author(s): Itzhak Ben-David, Francesco Franzoni, Byungwook Kim, Rabih Moussawi
Publication Date: February 2021
Keyword(s): competition for attention, ETFs, financial innovation
JEL(s): G12, G14, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15762

Exchange-traded funds (ETFs) are the most prominent financial innovation of the last three decades. Early ETFs offered broad-based portfolios at low cost. As competition became more intense, issuers started offering specialized ETFs that track niche portfolios and charge high fees. Specialized ETFs hold stocks with salient characteristics---high past performance, media exposure, and sentiment---that are appealing to retail and sentiment-driven investors. After their launch, these products perform poorly as the hype around them vanishes, delivering negative risk-adjusted returns. Overall, financial innovation in the ETF space follows two paths: broad-based products that cater to cost-conscious investors and expensive specialized ETFs that compete for the attention of unsophisticated investors.