The Impact of ETF Ownership and Trading Activity on the Informational Efficiency of South African Shares

The popularity of Exchange Traded Funds (ETFs) as an asset class has undoubtedly assisted in propelling passively managed products to the forefront of the financial market. While the superficial benefits and costs of this product are often debated, the potential impact of these investment assets on the microstructure elements of the financial market, and thus its overall impact on market stability, is less well known. This study aimed to fill the research gap by evaluating the impact of ETF ownership and trading activity on the information efficiency of its underlying assets in South Africa. The study used quarterly data from 94 JSE-listed firms, which are contained in 91 different domestic and international ETFs. The results from the two-step generalised method of moments (GMM) estimation found support for Merton's (1987) hypothesis, that the inclusion of a company into the ETF increases investor awareness, and thus facilitates an increase in firm-specific activity in the firm, which leads to greater overall market efficiency. In particular, the presence of ETFs seems to improve trade restrictions that exist for smaller firms on the JSE, which are usually dominated by the larger firms in terms of investor interest and trading activity. The study, therefore, recommended further efforts by South African regulators to grow the ETF asset class, which has a positive impact on financial market efficiency and stability.