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The effect of ETFs on financial markets: a literature review

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Abstract

Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs, are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review provides a broad overview of recent academic studies analyzing the effect of ETFs on liquidity, price discovery, volatility, and comovement of the underlying securities.

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Notes

  1. U.S. Securities and Exchange Commission (1988).

  2. Investment Company Institute (2019).

  3. CFTC (2010a), CFTC (2010b).

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Acknowledgements

The author thanks Prof. Dr. Manuel Ammann as well as Prof. Dr. Markus Schmid for their constructive and insightful comments.

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  1. Swiss Institute of Banking and Finance, University of St. Gallen, Unterer Graben 21, 9000, St. Gallen, Switzerland

    Luca J. Liebi

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Liebi, L.J. The effect of ETFs on financial markets: a literature review. Financ Mark Portf Manag 34, 165–178 (2020). https://doi.org/10.1007/s11408-020-00349-1

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