Discussion paper

DP15762 Competition for Attention in the ETF Space

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.


Ben-David, I, F Franzoni, B Kim and R Moussawi (2021), ‘DP15762 Competition for Attention in the ETF Space‘, CEPR Discussion Paper No. 15762. CEPR Press, Paris & London. https://cepr.org/publications/dp15762