Evolution of Broad-based and Specialized ETFs

How has the marketplace for exchange-traded funds (ETFs) evolved? What performances do its “species” deliver? In their January 2021 paper entitled “Competition for Attention in the ETF Space”, Itzhak Ben-David, Francesco Franzoni, Byungwook Kim and Rabih Moussawi summarize evolution of broad-based ETFs (tracking broad market and style indexes) and specialized ETFs (tracking sectors and narrow investment themes). They apply a 4-factor model of stock returns (accounting for market, size, value and momentum factors) to assess risk-adjusted performance (alphas) of these categories. Using monthly data for 1,080 U.S. equity ETFs (ignoring non-equity, foreign equity, inverse and leveraged ETFs) and monthly 4-factor model returns during 1993 through 2019, they find that: (more…)