Competition for Attention in the ETF Space

The interplay between investors' demand and providers' incentives has shaped the evolution of exchange-traded funds (ETFs). While early ETFs invest in broad-based indexes and therefore offered diversification at low cost, later products track niche port- folios and charge high fees. Strikingly, over their first five years, specialized ETFs lose about 30% in risk-adjusted terms. This underperformance cannot be explained by high fees or hedging demand. Rather, it is driven by the overvaluation of the underlying stocks at the time of the launch. Our results are consistent with providers catering to investors' extrapolative beliefs by issuing specialized ETFs that track attention- grabbing themes