Abstract
Exchange traded funds (ETFs) mirror an existing index by holding the same component stocks and matching the weighting scheme. ETFs offer services and investment flexibility that indexed mutual funds generally do not. We expect that if ETFs offer additional benefits over index funds, such as intra-day and option trading, then certain investors should prefer ETFs, leading to a movement of investment dollars from indexed products to ETFs. We test this hypothesis by examining the flow of funds into and out of indexed mutual funds that track the S&P 500 and the ETF Spider. We find that the Spider has a significantly negative effect on the flow of funds of indexed mutual funds.
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