Review of Accounting Studies

, Volume 22, Issue 3, pp 1048–1083 | Cite as

Is there a dark side to exchange traded funds? An information perspective

  • Doron Israeli
  • Charles M. C. Lee
  • Suhas A. SridharanEmail author


We examine whether an increase in ETF ownership is accompanied by a decline in pricing efficiency for the underlying component securities. Our tests show an increase in ETF ownership is associated with (1) higher trading costs (bid-ask spreads and market liquidity), (2) an increase in “stock return synchronicity,” (3) a decline in “future earnings response coefficients,” and (4) a decline in the number of analysts covering the firm. Collectively, our findings support the view that increased ETF ownership can lead to higher trading costs and lower benefits from information acquisition. This combination results in less informative security prices for the underlying firms.


Exchange traded funds (ETFs) Informed and unformed traders Trading costs Informational efficiency Pricing efficiency 

JEL classifications

G11 G14 M41 



We gratefully acknowledge research assistance from Woo Young Park and Padmasini Venkatachari. We thank Inessa Liskovich and Harrison Hong for kindly providing us with their data on Russell 2000 reconstitutions. We are grateful for helpful suggestions and comments from Russell Lundholm (Editor), Ira Yeung (Discussant), an anonymous referee, Will Cong, Larry Glosten, Ananth Madhavan, Ed Watts, Frank Zhang as well as seminar participants at Emory University, Interdisciplinary Center (IDC) Herzliya, Tel Aviv University, UCLA, the University of Iowa, Duke University, and Harvard University (IMO Conference 2016).


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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Doron Israeli
    • 1
  • Charles M. C. Lee
    • 2
  • Suhas A. Sridharan
    • 3
    Email author
  1. 1.Arison School of Business, The Interdisciplinary Center (IDC) HerzliyaHerzliyaIsrael
  2. 2.Graduate School of BusinessStanford UniversityStanfordUSA
  3. 3.Goizueta Business SchoolEmory UniversityAtlantaUSA

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