The rise of ETFs and market impact

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As the popularity of exchange-traded funds (ETFs) continues to grow at a rapid pace, the role that these basket or index-linked products play in the market is an ever-growing concern. For instance, ETFs now constitute more than 30% of the daily value traded in US exchanges. Suhas A. Sridharan, assistant professor of accounting, and coauthors Doron Israeli (Interdisciplinary Center Herzliya) and Charles M. C. Lee (Stanford U) dive into the issue by examining the impact of ETF ownership on the availability of information on individual securities and the market for those same securities. The trio analyzes a sample of 443 unique ETFs for the firm-year between 2000 and 2014. They note that ETFs are a particularly attractive investment vehicle for less informed traders. With trading costs for individual securities rising as a result of the flow to ETFs, more informed traders have less of an incentive β€œto expend resources to obtain firm-specific information.” As the depth and size of the ETF market grows, individual stock prices become less informative.