First Mover Advantage of Exchange-Traded Products

Abstract

Economic theory predicts that industries with switching costs and network effects tend to exhibit a first mover advantage, by which firms receive supranormal returns to innovation. However, few empirical studies have offered conclusive evidence for this claim, largely due to data limitations. We attempt to test for the presence of first mover advantage in the industry for sponsorship of exchange- traded funds (ETFs) and notes (ETNs), financial products for which intellectual property protection is absent and incentives to innovate must come from market mechanisms. Using a rich cross-sectional and panel data set of approximately 1700 exchange-traded products (ETPs) issued over 300 markets, we find a large and significant effect of first mover status on an ETP's assets under management (AUM) and market share, thus spurring frequent product innovation by ETP sponsors. We find evidence consistent with the hypothesis that first mover advantage is driven by product liquidity, a force analogous to network effects.