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Analyzing the Impact of ETF Market Growth on the Behavior of Component Stocks

This study analyzes the impact of Korea ETF market growth on trading costs, information efficiency and corporate valuation focusing on the behaviors of individual component stocks in ETFs.
The empirical analysis exhibits that an increase in the number of stocks held by ETFs has statistically significant effects on the bid-ask spreads of component stocks. In terms of the information efficiency, the correlations between componet stocks and the market, and industry return are statistically significant, suggesting the expansion of the ETF market could be a factor to allow market systematic risks higher.
The impact of ETF on PBR is found to be statistically significant in the positive direction, howing that the growth of the ETF market could be conducive to making the value of component stocks overvalued relative to their fundamentals.
These findings explain that negative side effects may occur from the rapid expansion of the ETF market and suggest special attention and policy considerations are needed to avoid unintended effects resulting from the growth of the ETF market.