A new ETF Landscape and its Relationship to the Volatility of its Underlying Assets - An empirical study of the S&P 500

Abstract: The global market for exchange traded funds (ETFs) has during the last decade sustained substantial growth. A global increase of AUM from ~400 billion USD in 2005 to above 7.7 trillion USD in 2020 has brought with it a changed landscape. With an anchor in prominent literature, jointly indicating that ETFs have inadvertent consequences on their underlying securities, we study the relationship between ETFs and volatility of the underlying assets through estimated regression models. Examining data on the constituents of the S&P 500 for a previously uninvestigated period of five years, we find no positive correlation between increased ETF ownership and volatility, contrasting previous findings. Additionally, we provide novel insight through dissecting our set of ETFs into distinct categories, studying their separate effects. Our results indicate that effects and magnitude differ depending on the ETF category, with varying significance.