Beyond the dark side : ETFs and market efficiency in the S&P 500

Abstract

This thesis examines whether ETF ownership affects market efficiency in the large-cap U.S. equity market, focusing on a S&P 500 firm sample, from 2010 to 2023. The analysis builds on the paper “Is there a dark side to ETFs? An information perspective” by Israeli, Lee, and Sridharan (2017), and tests three efficiency metrics: liquidity (Amihud illiquidity), price informativeness (Future Earnings Response Coefficient), and analyst coverage (number of EPS forecasters), as well as the moderating effect of firm size. No significant relationships are found between ETF ownership and any of the tested efficiency metrics, nor does firm size alter these effects. These results imply that ETF ownership has not significantly affected market efficiency in the S&P 500 for the tested period. Active investors' stabilizing influence, higher resilience of liquid markets, the rise of more actively managed ETFs and improved market infrastructure in the post 2010 era are some potential explanations for these results. This evidence suggests that passive ownership has heterogeneous, context-dependent effects rather than a uniform "dark side" within large-cap U.S. stocks.Keywords: Exchange traded fund, Passive investing, Market efficiency, S&P 500