ETFs Are Reducing Market Efficiency

ETFs have attracted plenty of criticism over the past few years, and according to researchers at Stanford University, Emory University and the Interdisciplinary Center of Herzliya in Israel, at least some of these concerns are valid. The researchers published a paper on the topic last month within which they examined whether an increase in ETF ownership is accompanied by a decline in pricing efficiency for the underlying component securities. What they found only confirmed their initial predictions: ETFs are reducing market efficiency. Specifically, the study finds that an increase in ETF ownership is associated with (1) higher trading costs (bid-ask…