Review of Financial Studies Vol. 37 No. 10 2024

The Value of ETF Liquidity

Marta Khomyn¹; Talis Putnins²; Marius Zoican³

¹ The University of Adelaide , Australia · ² Stockholm School of Economics in Riga, Latvia, and University of Technology Sydney, and Digital Finance CRC , Australia · ³ Haskayne Business School, University of Calgary , Canada

Abstract

We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium.

DOI

10.1093/rfs/hhae041

Volume

37

Issue

10

Pages

3092-3148

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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