ETF indexing strategies and asset prices: Experimental evidence

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 ..