Is competition beneficial? The case of exchange traded funds |
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| Institution: | 1. College of Business, Illinois State University, Campus Box 5480, Normal, IL, 61790, USA;2. Jones College of Business, Middle Tennessee State University, 1301 East Main Street, Murfreesboro, TN, 37123, USA;1. Beedie School of Business, Simon Fraser University, Canada;2. Ecole hôtelière de Lausanne, HES-SO Haute école spécialisée de Suisse occidentale, Switzerland;1. Research Center of the Central China for Economic and Social Development, Nanchang University, China;2. School of Economics and Management, Nanchang University, China;3. Department of Accounting Information, National Taichung University of Science & Technology, 129, Sanmin Rd, Sec. 3, Taichung, 40401, Taiwan |
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| Abstract: | New ETF creation has surged in recent years, giving investors the option to choose from a wide range of similar ETFs within each group of competitors. We identify groups of ETFs that can be considered direct competitors and examine the impact of competition on their market quality. Results show improved market quality measures when competition increases. A change equivalent to going from a monopoly to a highly competitive market results in a 29% decrease in bid–ask spreads, a 72% decrease in illiquidity, and a 52% increase in turnover. However, we find that competition has a differential impact on ETFs according to their market depth. Market quality improves with competition for large or well-performing ETFs, while it worsens for small or under-performing ETFs. A case study on ETFs banned by the SEC in March 2010 further highlights our results in the artificially controlled competitive environment of the moratorium. |
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| Keywords: | ETFs Competition Market quality Market microstructure |
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