The Impact of Exchange-Traded Fund Index Inclusion on Stock Prices

We report a laboratory experiment examining how demand for exchange-traded fund (ETF) index products affects the prices and trading volume of assets. We compare an environment where the ETF index includes all assets against an environment where a redundant asset is excluded from the index. We find that (i) subjects place significant value on the ETF index asset beyond the value of its constituent assets; (ii) there is a substantial index premium for included assets; and (iii) the index premium persists even when short selling is permitted. The price increases of the constituent assets and of the ETF itself suggest that ETF products can distort markets to some degree.