Research Papers On Etfs

Exchange Traded Funds: A New Investment Option for Taxable Investors

James M. Poterba, John B. Shoven

NBER Working Paper No. 8781
Issued in February 2002
NBER Program(s):Asset Pricing, Public Economics

Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8781

Published: Poterba, Jaems M. and John B. Shoven. "Exchange-Traded Funds: A New Investment Option For Taxable Investors," American Economic Review, 2002, v92(2,May), 422-427. citation courtesy of

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Exchange Traded Funds (ETFs)

35 PagesPosted: 8 Nov 2016Last revised: 16 Sep 2017

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

There are 2 versions of this paper

Date Written: August 2017


Over nearly a quarter of a century, ETFs have become one of the most popular passive investment vehicles among retail and professional investors due to their low transaction costs and high liquidity. By the end of 2016, the market share of ETFs topped over 10% of the total market capitalization traded on US exchanges, while representing more than 30% of the overall trading volume. ETFs revolutionized the asset management industry by taking market share from traditional investment vehicles such as mutual funds and index futures. Because ETFs rely on arbitrage activity to synchronize their prices with the prices of the underlying portfolio, trading activity at the ETF level translates to trading of the underlying securities. Researchers found that while ETFs enhance price discovery, they also inject non-fundamental volatility to market prices and affect the correlation structure of returns. Furthermore, ETFs impact the liquidity of the underlying portfolios, especially during events of market stress.

Keywords: ETFs, Mutual Funds, Investment Managers, Volatility, Arbitrage, Fund Flows

JEL Classification: G12, G14, G15

Suggested Citation:Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Exchange Traded Funds (ETFs) (August 2017). Annual Review of Financial Economics, Volume 9, 2017, Forthcoming; Charles A. Dice Center Working Paper No. 2016-22; Fisher College of Business Working Paper No. 2016-03-022; Swiss Finance Institute Research Paper No. 16-64. Available at SSRN: or

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