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

We report on a laboratory experiment examining how demand for ETF index products affects the prices and trading volume of assets. We compare an environment where the ETF index includes all assets in a market 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.