Exchange‐Traded Fund Introductions and Closed‐End Fund Discounts and Volume

Scott W. Barnhart and Stuart Rosenstein

The Financial Review, 2010, vol. 45, issue 4, 973-994

Abstract: Exchange‐traded funds (ETFs), like closed‐end funds (CEFs), are managed portfolios traded like individual stocks. We hypothesize that the introduction of an ETF in an asset class similar to an existing CEF results in a substitution effect that reduces the value of the CEF's shares relative to that of its underlying assets. Our event studies show that upon the introduction of a similar ETF, CEF discounts widen significantly and relative volume declines significantly. Single‐equation and systems estimation models show that the widening in discounts and reduction in volume are related to returns‐based measures of the substitutability of ETFs for CEFs.

Date: 2010
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