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Do ETFs Increase the Commonality of their Underlying Assets? Evidence from a Switch in ETF Replication Technique

Author

Listed:
  • Fabrice Riva

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Thomas Marta

Abstract

We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identication that exploits the switch from synthetic to physical replication of a large French ETF. After theswitch, constituent stocks experience greater commonality, in both returns andliquidity. For both the full sample of ETF constituents and the least liquid ETFconstituents, a larger part of the variation in individual stock returns or liquidityis explained by market-wide variations. We present evidence that ETF creationand redemption is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

Suggested Citation

  • Fabrice Riva & Thomas Marta, 2022. "Do ETFs Increase the Commonality of their Underlying Assets? Evidence from a Switch in ETF Replication Technique," Post-Print hal-04659197, HAL.
    • Handle: RePEc:hal:journl:hal-04659197
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    Keywords

    ETFs; commonality;

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