Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique

Thomas Marta and Fabrice Riva

Journal of Banking & Finance, 2025, vol. 170, issue C

Abstract: We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification that exploits the switch from synthetic to physical replication of a large French ETF. After the switch, constituent stocks experience greater commonality, in both returns and liquidity. For both the full sample of ETF constituents and the least liquid ETF constituents, a larger part of the variation in individual stock returns or liquidity is explained by market-wide variations. We present evidence that ETF creation and redemption is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

Keywords: ETF; Comovements; Price efficiency (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:170:y:2025:i:c:s0378426624002474

DOI: 10.1016/j.jbankfin.2024.107333

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