Working Paper: CEPR ID: DP12629
Authors: Martin Lettau; Ananth Madhavan
Abstract: Exchange-traded funds (ETFs) represent one of the most important financial innovations in decades. An ETF is an investment vehicle that trades intraday and seeks to replicate the performance of a specific index. In recent years ETFs have grown substantially in assets, diversity, and market significance. This growth reflects the rise in passive asset management where investors seek to track a benchmark index rather than outperform the market as a whole. As a consequence, there is increased attention by investors, regulators, and academics seeking to assess and understand the implications of this rapid growth. This article explains the key drivers of ETF growth and their implications for economists and policy makers.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Growth of ETFs (G23) | Increased attention from investors, regulators, and academics (G18) |
| Growth of ETFs (G23) | Potential to reshape the investment landscape (G24) |
| Structure of ETFs (G23) | Price adjustments in response to supply and demand (D49) |
| Creation-redemption mechanism of ETFs (G10) | Helps maintain the price close to the intrinsic value (D46) |
| Growth of ETFs (G23) | Risks such as price distortions during high volatility (G13) |