Exchange-traded Funds Ownership Research Articles

Does Exchange-traded Fund Ownership Affect a Firm’s Expected Crash Risk?

We examine the effect of equity ownership by exchange-traded funds (ETFs) on the expected (ex ante) crash risk of the underlying securities. We observe a positive relationship between ETF ownership and the firm’s expected crash risk. Our findings suggest that ETFs increase information opacity, leading managers to withhold negative news, which in turn amplifies the anticipated crash risk. We demonstrate a positive causal relationship between ETFs and expected crash risk by using the Russell 1000/2000 index reconstitution as an instrument for ETF ownership and ETF initiation as staggered exogenous shocks on ETF ownership. Moreover, this association becomes more noticeable when ETF ownership is broader, the ETF is larger, and the company’s information environment is more opaque.

ETF ownership and stock liquidity: evidence from China

ABSTRACT Due to their low participation cost, exchange-traded funds (ETFs) are booming in China. We find that stocks with higher ETF ownership display higher liquidity while controlling for other institutional ownership. In the post-crash periods when ETF market evolves rapidly, the impact becomes greater. For large-capitalization stocks, ETF ownership has a stronger impact on stock liquidity. The liquidity shocks in the ETFs market can propagate to the underlying stocks through the instantaneous creation/redemption arbitrage mechanism. Moreover, ETF market makers create/redeem to manage their inventory risk, therefore introducing liquidity to stocks.

The flow‐performance puzzle: Insights from passive and active ETFs

AbstractThis study examines the relationship between fund flows and subsequent performance, testing the smart money and price pressure hypotheses within the context of passive and active exchange‐traded funds (ETFs). By differentiating between managerial skill and non‐fundamental demand shocks, we uncover a significant positive flow‐performance relationship, challenging traditional attributions solely to investor skill in identifying superior fund management. We further develop a measure of flow shocks to individual stocks by aggregating daily changes in ETF ownership of 5600 stocks. An event study on ETF constituents further disentangles the effects of price pressure from smart money. Through robust analyses, including Fama–French industry portfolios and propensity score matching, our findings suggest a nuanced interaction between investor behaviour and market dynamics, contributing to the discourse on fund flows' impact on performance. This research highlights the complexity of the flow‐performance relationship and its implications for fund management and investment strategies, offering new insights into the mechanisms driving fund performance in the ETF landscape.

Do exchange traded funds affect corporate cash holdings?

AbstractWe examine the effects of equity ownership by exchange traded funds (ETFs) on corporate cash holdings. We find that firms increase their cash holdings in response to higher anticipated risks generated by ETFs. To establish a causal interpretation, we use the Russell 1000/2000 index reconstitution as an instrument for ETF ownership. We further show that shareholders place a higher value on the additional cash held by firms with higher ETF ownership. These findings are more pronounced among financially constrained firms. Overall, our results suggest that firms hold more precautionary cash to mitigate future funding needs due to higher ETF‐induced risks.

Exchange‐traded fund ownership and underlying stock mispricing

AbstractIn response to the increasing proliferation of exchange‐traded funds (ETFs), and a warning from the Wall Street hero Michael Burry that passive investing has put the stock market into ‘bubble’ territory, we examine the relation between stock ownership by ETFs and mispricing from 2002 to 2018. We find that increased ETF ownership induces overpricing in underlying stocks. We then identify three mechanisms for this relationship: the overpricing of stocks attributable to increased ETF ownership is stronger for stocks that experience an increase in passive ETF ownership; during periods characterised by high investor sentiment; and for illiquid stocks. Our results are robust to a battery of tests including alternative measures for all key variables and are not confounded by the global financial crisis. Additional analyses show that mispricing caused by ETF ownership change is not driven by firm fundamentals and does not exacerbate stocks' information environment around earnings announcement.

ETFs and information asymmetry of underlying securities: evidence on the volume-conditioned return autocorrelation

ABSTRACT This study investigates whether exchange-traded funds (ETFs) increase the information asymmetry of underlying securities by examining the relationship between the US equity ETF ownership or turnover and the volume-conditioned daily return autocorrelation proposed by. Specifically, we find that stocks with higher ETF ownership exhibit weaker return reversals. We confirm that the ETF ownership effect is robust in a variety of settings, such as various volume measures, within industry, and various regression frameworks. We also address the difference between the volume-conditioned autocorrelation and the unconditional autocorrelation. Moreover, we document that higher ETF turnover leads to weaker return reversals, independently of the ETF ownership effect. These findings suggest that higher ETF presence allows more informed traders to engage in trades or more liquidity traders to migrate to ETFs from underlying securities, resulting in higher information asymmetry for underlying securities.

Do ETFs affect ADRs and U.S. domestic stocks differently?

This study examines the effect of exchange-traded funds (ETFs) on their underlying American depositary receipts (ADRs). We find that the percentage of ADR shares owned by ETFs increased dramatically in the past two decades. While ETF ownership is positively associated with stock liquidity for ADR firms, the same is not true for U.S. firms. In addition, ETF ownership improves ADR firms’ information environment by helping incorporate their earnings information. Furthermore, ETF ownership helps incorporate systematic related earnings into stock returns but not firm-specific earnings. Overall, our results show that ETFs are beneficial to ADR stocks by providing better liquidity and information efficiency. Our results are interesting to academics, investors, and policy makers.

Exchange-Traded Funds Ownership and Stock Volatility

This study investigates whether exchange-traded funds (ETFs) increase the nonfundamental volatility of stocks in their baskets via the arbitrage channel. Since the price and the net asset value of the ETF underlying stocks are tied by arbitrage, liquidity shocks to the ETFs may propagate to the underlying stocks through arbitrage trading, which is called the liquidity trading hypothesis. We test the implications of this hypothesis using a sample of ETFs that track the KOSPI200 index. We address the potential endogenous relationship between ETF ownership and stock volatility using the KOSPI200 index reconstitution event as an instrumental variable in the two-stage least squares regression framework; we find the effect of ETF ownership on stock volatility is positive and significant. We also provide empirical evidence that foreign and domestic institutional investors exhibit more frequent trading in the opposite direction and higher-order imbalances for stocks with higher ETF ownership. In summary, our findings suggest that the growth of the ETFs in the Korean stock market may have had an unintended consequence of the higher volatility of ETFunderlying stocks.

ETF ownership and corporate cash holdings

AbstractDo exchange‐traded funds (ETFs) influence corporate cash holding decisions? Consistent with reduced managerial learning from the stock market and increased uncertainty due to higher ETF ownership, we show that firms included in ETF baskets have higher cash holdings as a precautionary response. We address endogeneity concerns through different natural experiments, namely, the reconstitution of the Russell 1000/2000 index and BlackRock's acquisition of iShares. We identify changes in revenue, external financing, share repurchases and net working capital as potential channels through which cash holdings increase due to higher ETF ownership, with cash holdings increases having a positive impact on firm value.

The European ETF Market: Growth, Trends, and Impact on Underlying Instruments

This article presents some key figures about the European market for exchange-traded funds (ETFs), with a focus on growth, key trends, and impact on underlying instruments. One particular important area of growth is the environmental, social, and governance (ESG) ETF segment, with the market size in Europe exceeding that in the United States both in terms of assets under management (AUM) and number of products, although the gap has tended to decrease slightly over time. Turning to ETF ownership, the authors find several reasons to expect the impact of ETFs on European equity markets to be more modest than that documented in the academic literature for the US equity markets, namely a materially lower level of average ETF ownership and a primarily international ownership (i.e., located in the United States). These figures are put in perspective with the results of a survey carried out during the first quarter of 2021, which provides insights into European professional investor perceptions of ETFs. The survey also reveals a particularly strong appetite for ESG-themed funds, and ETFs appear to be a useful instrument for integrating an ESG component into investment decisions. <b>TOPICS:</b>ESG investing, exchange-traded funds and applications, developed markets, performance measurement <b>Key Findings</b> ▪ ETF ownership of European stocks is about half that of US stocks; the European ESG ETF market size exceeds that in the United States, both in terms of AUM and the number of products, but incremental AUM are now almost on par. ▪ European investors show great interest in SRI/ESG investment, with 55% of ETF users already investing in SRI/ESG in 2021 and 68% of those who have not yet done so considering integrating ESG into their portfolios in the near future. ▪ ETFs appear to be a useful instrument for integrating an SRI/ESG component into investment, with 67% of respondents using them to do so and 60% wishing to see further developments in SRI/ESG-based ETFs and/or low-carbon ETFs.

ETFs and information transfer across firms

This paper examines the role that exchange-traded funds (ETFs) play in the transfer of information across firms around earnings announcements. Our analysis focuses on the differences in information transfer between broad-based and sector ETFs. We find that firms with sector ETF ownership are associated with reduced over-extrapolation of intra-industry information, increased earnings response coefficients (ERCs), greater responsiveness to the industry and idiosyncratic components of earnings surprise, and reduced post-earnings announcement drift. Conversely, broad-based ETFs are associated with decreased ERCs and lower responsiveness to industry and idiosyncratic information. Follower firms in sector ETFs show stronger reactions and weaker reversals when leader firms in the same ETFs release earnings, while follower firms in broad-based ETFs show weaker reactions and greater reversals. Overall, sector ETFs have improved informational efficiency by facilitating information transfer, while broad ETFs might have worsened informational efficiency in the context of earnings announcements.

ETF Corporate Bond Ownership and Market Quality

This paper examines the role exchange-traded funds (ETFs) play in providing information to underlying corporate bond markets. We document liquidity improvements for individual corporate bonds regardless of market direction. That increased liquidity, however, comes at the cost of greater market sensitivity. Three separate tests show that increased ETF ownership increases the systematic risk component of bond prices and disrupts the flow of firm-specific information to underlying bonds. The results suggest, therefore, that while ETF ownership improves bond market liquidity, ownership is associated with a dissociation between bond prices and firm fundamentals. Mutual fund ownership does not have the same effect, suggesting the active intraday trading that is the hallmark of ETFs may also serve as the mechanism through which information flow is affected.

Do Exchange Traded Funds Affect Corporate Cash Holdings?

We examine the effects of equity ownership by exchange traded funds (ETFs) on corporate cash holdings. We find that firms increase their cash holdings in response to higher anticipated risks generated by ETFs. To establish a causal interpretation, we use the Russell 1000/2000 index reconstitution as an instrument for ETF ownership. We further show that shareholders place a higher value on the additional cash held by firms with higher ETF ownership. These findings are more pronounced among financially constrained firms. Overall, our results suggest that firms hold more precautionary cash to mitigate future funding needs due to higher ETF-induced risks.

Index Fund and ETF Ownership and the German Market for Corporate Control

If a bidder launches a takeover offer for a listed company being part of a stock market index, then index funds and exchange traded funds (ETF) as shareholders of this company cannot easily tender their shares without losing track of the index. This paper analyzes the impact of index fund and ETF ownership on the success of takeover offers in Germany. Based on a sample of 323 takeover offers of publicly listed German companies between 2006 and 2018, we document a significant negative impact of index fund and ETF ownership on takeover success. The fraction of outstanding shares eventually being tendered is decreasing with an increase in the stake of index funds and ETF: a one standard deviation increase in pre-offer index fund and ETF ownership reduces the fraction of outstanding shares gained by the bidder by 4.5 percentage points. For control-taking takeover bids with a bidder’s toehold below 30% this value increases to 9.9 percentage points. Thus, our results suggest the increasing importance of index funds and ETF to weaken the German market for corporate control.

ETF Ownership and Corporate Cash Holdings

Do exchange-traded funds (ETFs) influence corporate cash holding decisions? Consistent with the reduced managerial learning from the stock market and increased uncertainty due to higher ETFs ownership, we show that firms included in ETFs’ baskets have higher cash holdings as a precautionary response. We address endogeneity concerns through instrumental variable, dynamic generalized methods of moments, and propensity score matching methods. We identify changes in revenues, external financing, share repurchases, and net working capital as potential channels through which cash holdings increase due to higher ETFs ownership. This increase in cash holdings is associated with a positive impact on firm value.

Fixed Income ETFs and Bond Liquidity

This paper examines the impact of Fixed Income Exchange-Traded Funds (ETFs) on corporate bond liquidity. I find that corporate bonds ETFs decrease the transaction costs of their constituent securities. The use of two distinct quasi-natural experiments, that control for the identification issues of self-selection and of an index effect, establishes a causal relation between ETF ownership and bond liquidity. Moreover, ETFs do not deteriorate the liquidity of their bonds during ETF arbitrage and market stress events. The ETF trading volume appears to be the transmission mechanism driving the results.

The Real Effects of Exchange Traded Funds

How do exchange-traded funds (ETFs) influence real investment policies? We find that ETF ownership is associated with an increase in the sensitivity of real investment to Tobin's q. This implies a managerial learning channel, wherein higher ETF ownership increases price informativeness about systematic shocks. Supporting this pathway, higher ETF ownership is associated with higher predictability of future systematic earnings from stock prices, and reduced responsive of investment to stock prices of peers. Overall, the evidence is inconsistent with ETFs exerting a negative effect on real efficiency; the opposite hypothesis receives more support in the data.

Do ETFs Increase Volatility?

ABSTRACTDue to their low trading costs, exchange‐traded funds (ETFs) are a potential catalyst for short‐horizon liquidity traders. The liquidity shocks can propagate to the underlying securities through the arbitrage channel, and ETFs may increase the nonfundamental volatility of the securities in their baskets. We exploit exogenous changes in index membership and find that stocks with higher ETF ownership display significantly higher volatility. ETF ownership increases the negative autocorrelation in stock prices. The increase in volatility appears to introduce undiversifiable risk in prices because stocks with high ETF ownership earn a significant risk premium of up to 56 basis points monthly.

Do ETFs Reduce Transaction Costs?

This paper investigates the impact of exchange-traded funds (ETFs) on the liquidity of their underlying stockholdings. Using a difference-in-differences methodology for large changes in the index weights of stocks in the S&P 500 and NASDAQ 100 indexes, we find that increases in ETF ownership are associated with increases in commonly used measures of liquidity. Stocks with high ETF ownership have higher price resilience and lower adverse selection costs. However, ETFs are linked to higher liquidation costs during the 2011 U.S. debt-ceiling crisis, suggesting that stocks with high ETF ownership may experience impaired liquidity during major market stress events.

The impact of innovation: Evidence from corporate bond exchange-traded funds (ETFs)

Using distinct features of corporate bond exchange-traded funds (ETFs), I find that financial innovation has a significant and long-term positive valuation impact on the systemically important underlying securities. A one standard deviation increase in ETF ownership reduces high-yield and investment-grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03% and 0.75%. Two novel quasi-natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, I find that ETFs decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds.