Does membership come with privileges? The effect of ETFs on firm value

Raphaël Grach

Exchange traded funds (ETFs) are in line to become the next big hit on financial markets. ETFs are a specific category of financial instruments that aim at replicating the performance of an underlying basket of securities. Since they are relatively new, ETFs are met with growing enthusiasm in both academia and in the financial world and some start to wonder if their apparent convenience hides a darker side where they create distortions. I use the yearly Russell 3000 reconstruction to study the effects of ETFs ownership on three different measures of the value of the firms that compose the index.