Proliferation in the ETF Industry” joint with André Romahn

Abstract:

We study the proliferation observed in the ETF industry in the last two decades. This market exhibits considerable price dispersion despite the fact that products are fairly homogeneous. We show that limited investor attention, cast in a model of sequential search, explains the observed patterns very well. Across ETF categories, average search costs decrease over time, whereas the variance increases, possibly due to the inflow of new investor types.  Search costs are higher in specialized ETF categories. In counterfactual analysis, we show that making information more accessible reduces fees by up to 50%.