Work

ETF indexing strategies and asset prices: Experimental evidence

Year: 2025

Type: article

Abstract: We experimentally examine whether and how the indexing strategy used by exchange traded funds (ETFs) affects the prices of the constituent assets. We study this issue in both the primary market (ETF creations and redemptions using bots as authorized participants) and the secondary market. The experiment includes three environments: (i) no ETF, (ii) an equal weighted ETF, and (iii) an unequal, market cap weighted ETF. We find that compared to the baseline of no ETFs, the introduction of ETFs significantly affects the relative prices of the constituent assets in the equal weighted ETF but not in the unequal weighted, market-cap based ETF. The introduction of ETFs also affects order imbalances and bid-ask spreads particularly for the asset in shortest supply.

Source: Journal of Economic Behavior & Organization

DOI: 10.1016/j.jebo.2025.107342

Authors: Peter Bossaerts, John Duffy, Jean Paul Rabanal, Olga A. Rud, Nitin Yadav

Institutions: University of Cambridge, University of California, Irvine, The University of Osaka, University of Stavanger, The University of Melbourne

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,180

Funders: Leverhulme Trust, University of Melbourne, Australian Research Council