The Dark Side of ETF Investing: A World-Wide Analysis

Si Cheng National University of Singapore (NUS) – Department of Finance
Massimo Massa INSEAD – Finance
Hong Zhang INSEAD – Finance
March 8, 2013
INSEAD Working Paper No. 2013/39/FIN
We study conflicts of interest in the exchange-traded fund (ETF) industry around the world. We provide evidence that ETFs provide cheap funding resources to benefit the other members of the financial groups to which they belong. We identify three channels via which this happens. First, the ETF’s assets are used by the affiliated bank to leverage its (lending-related) information. Second, ETFs subsidize affiliated banks when the latter are in need, i.e., unprofitable or poorly rated. Third, the ETFs help affiliated OEFs through cross-trading, that is, they load up on unnecessary (to track the benchmark) volatility that will expose them in the event that the affiliated bank becomes distressed. The effects prevail in ETFs that do not fully replicate their benchmark holdings and that domiciled in Europe. Market awareness of this risk is reflected in reduced flows and a lower ETF price premium. These results have important normative implications for both consumer protection and financial stability.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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