Dominated ETFs

Within the growing market for exchange-traded funds (ETFs), the authors identify many dominated ETFs with returns that are highly correlated with those of cheaper, more liquid competitors. Both retail and institutional investors overallocate to dominated funds with nonindex strategies. The authors estimate the aggregate excess fees paid by investors to dominated US equity ETFs to be $4.7bn from 2000 to 2018. This cost is growing over time as newly listed ETFs claim unique strategies despite high correlations with cheap, well-established index ETFs. Dominated ETFs survive and thrive even without advisor incentive misalignments, suggesting limitations on the potential benefits of expanding fiduciary standards.