Do ETFs Increase the Commonality of their Underlying Assets? Evidence from a Switch in ETF Replication Technique

Fabrice Riva and Thomas Marta
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Fabrice Riva: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identication 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.

Date: 2023-06
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Published in 39th Conference of the French Finance Association (AFFI), Jun 2023, Bordeaux, France

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Working Paper: Do ETFs Increase the Commonality of their Underlying Assets? Evidence from a Switch in ETF Replication Technique (2023)
Working Paper: Do ETFs Increase the Commonality of their Underlying Assets? Evidence from a Switch in ETF Replication Technique (2022)
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