Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)
- Chair: Anna Pavlova, London Business School
The Hidden Cost of Corporate Bond ETFs
AbstractI document a hidden but substantial cost associated with the liquidity transformation that corporate bond exchange-traded funds (ETFs) provide. When creating new shares, authorized participants (APs) deliver a subset of the portfolio of bonds that underlie a corporate bond ETF. This subset contains bonds that realize low future returns, reducing ETF performance by 48 basis points per annum. This loss in performance cannot be attributed to forgone compensation for risk or illiquidity, but instead results from APs utilizing information regarding future changes in net asset values to strategically deliver bonds when those bonds are expected to realize poor performance in the near future.
Index Providers: Whales Behind the Scenes of ETFs
AbstractMost ETFs replicate indexes licensed by index providers. We show that index providers wield strong market power and charge large markups to ETFs that are passed on to investors. We document three stylized facts: (i) the index provider market is highly concentrated; (ii) investors care about the identities of index providers, although they explain little variation in ETF returns; and (iii) over one-third of ETF management fees are paid as licensing fees to index providers.
A structural decomposition attributes 60% of licensing fees to index providers' markups. Counterfactual analyses show that improving competition among index providers reduces ETF fees by up to 30%.
- G1 - Asset Markets and Pricing