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The Impact of Exchange-Traded Fund Index Inclusion on Stock Prices

Author

Listed:
  • John Duffy

    (Department of Economics, University of California, Irvine, Irvine, California 92697; Institute of Social and Economic Research, Osaka University, Osaka 567-0047, Japan)

  • Daniel Friedman

    (Department of Economics, University of California, Santa Cruz, Santa Cruz, California 95064; Department of Economics, University of Essex, Colchester CO4 3SQ, United Kingdom)

  • Jean Paul Rabanal

    (Department of Economics and Finance, University of Stavanger, 4021 Stavanger, Norway)

  • Olga A. Rud

    (Department of Economics and Finance, University of Stavanger, 4021 Stavanger, Norway)

Abstract

We report a laboratory experiment examining how demand for exchange-traded fund (ETF) index products affects the prices and trading volume of assets. We compare an environment where the ETF index includes all assets against an environment where a redundant asset is excluded from the index. We find that (i) subjects place significant value on the ETF index asset beyond the value of its constituent assets; (ii) there is a substantial index premium for included assets; and (iii) the index premium persists even when short selling is permitted. The price increases of the constituent assets and of the ETF itself suggest that ETF products can distort markets to some degree.

Suggested Citation

  • John Duffy & Daniel Friedman & Jean Paul Rabanal & Olga A. Rud, 2025. "The Impact of Exchange-Traded Fund Index Inclusion on Stock Prices," Management Science, INFORMS, vol. 71(1), pages 21-34, January.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:21-34
    DOI: 10.1287/mnsc.2022.02125
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