ETFs and Information Asymmetry of Underlying Securities : Evidence on the Volume-Conditioned Return Autocorrelation

This study investigates whether exchange-traded funds (ETFs) increase the information asymmetry of underlying securities by examining the relationship between the US equity ETF ownership or turnover and the volume-conditioned daily return autocorrelation proposed by Llorente, Michaely, Saar, and Wang (2002). Specifically, we find that stocks with higher ETF ownership exhibit weaker return reversals. We confirm that the ETF ownership effect is robust in a variety of settings, such as various volume measures, within industry, and various regression frameworks. We also address the difference between the volume-conditioned autocorrelation and the unconditional autocorrelation. Moreover, we document that higher ETF turnover leads to weaker return reversals, independently of the ETF ownership effect. These findings suggest that higher ETF presence allows more informed traders to engage in trades or more liquidity traders to migrate to ETFs from underlying securities, resulting in higher information asymmetry for underlying securities