The Value of ETF Liquidity

Marta Khomyn, Tālis Putniņs̆Stockholm and Marius Zoican

The Review of Financial Studies, 2024, vol. 37, issue 10, 3092-3148

Abstract: We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium.

Keywords: G11; G12; G14 (search for similar items in EconPapers)
Date: 2024
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