Working Paper: NBER ID: w24250
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.
Keywords: Exchange-Traded Funds; Passive Asset Management; Market Stability; Liquidity; Financial Innovation
JEL Codes: G0; G12; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Growth of ETFs (G23) | Shift in investor behavior towards passive asset management (G40) |
| Shift in investor behavior towards passive asset management (G40) | Increased market liquidity (G19) |
| Growth of ETFs (G23) | Changes in price discovery mechanisms (D47) |
| Growth of ETFs (G23) | Price distortions due to trading structures (L11) |
| Liquidity provided by ETFs (G23) | Excessive trading (G14) |
| Excessive trading (G14) | Market volatility (G17) |
| Growth of ETFs (G23) | Unexpected risks (D81) |