59 Pages Posted: 6 Nov 2020 Last revised: 24 Mar 2021
Date Written: March 24, 2021
We study dominated products in the market for U.S. equity exchange-traded funds (ETFs). We identify a large number of dominated ETFs with returns that are highly correlated with those of cheaper, more liquid competitors. Counterintuitively, these dominated ETFs attract excess capital relative to expectations based on fund characteristics related to fees, liquidity, performance, strategy uniqueness, and investor awareness. We estimate the aggregate cost to investors from allocating capital to dominated ETFs to be \$1.0 billion to \$6.7 billion from 2000 to 2018. These costs are growing over time as newly listed ETFs claim unique strategies despite high correlations with cheaper ETFs.
Keywords: Exchange Traded Funds (ETFs), Dominated Products, Smart Beta
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation