Index providers: Whales behind the scenes of ETFs

Yu An, Matteo Benetton and Yang Song

Journal of Financial Economics, 2023, vol. 149, issue 3, 407-433

Abstract: Most ETFs replicate indexes licensed by index providers. We show that index providers wield strong market power and charge large markups to ETFs that are passed on to investors. We document three stylized facts: (i) the index provider market is highly concentrated; (ii) investors care about the identities of index providers, although they explain little variation in ETF returns; and (iii) over one-third of ETF expense ratios are paid as licensing fees to index providers. A structural decomposition attributes 60% of licensing fees to index providers’ markups. Counterfactual analyses show that improving competition among index providers reduces ETF expense ratios by up to 30%.

Keywords: ETF; Index provider; Licensing fee; Expense ratio; Competition (search for similar items in EconPapers)
JEL-codes: G12 G23 G5 L1 L2 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:3:p:407-433

DOI: 10.1016/j.jfineco.2023.06.003

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