“The Market for Benchmarks: Evidence from ETFs” by Prof. Leonard Kostovetsky
Prof. Leonard Kostovetsky
Assistant Professor of Finance
Carroll School of Management
Index benchmarks are provided for the $4.5 trillion U.S exchange-traded funds (ETF) industry by an oligopoly of brand name index providers (e.g., S&P, Russell, MSCI), a large number of smaller providers, and a growing group of self-indexing firms. We investigate how investors view these different benchmark types. Overall, we find a significant branding benefit, as ETF benchmarks with larger index providers are able to attract more capital from investors. We also find a clientele effect, with institutional investors exhibiting a strong preference for brand name benchmarks, and no such preference from do-it-yourself retail investors. This “institutional” preference actually comes from financial advisors who invest on behalf of individual clients, and even more specifically, on behalf of wealthy individuals. On the other hand, we find no evidence that any type of investor either values or devalues self-indexed benchmarks, after controlling for indexer size. In an event study type of framework, we show that ETFs that change benchmarks, have 7% higher flows in the subsequent three months, again driven by institutional flows. Our paper describes the market for benchmarks, what benchmark characteristics attract investors, and how this varies among the main ETF investor types.