Khomyn, M.Putnins, T.Zoican, M.Goldstein, I.2024-10-082024-10-082024The Review of Financial Studies, 2024; 37(10):3092-31480893-94540893-9454https://hdl.handle.net/2440/142709We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium.en© The Authors 2024. Published by Oxford University Press. This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact journals.permissions@oup.comETF secondary market liquidity, feesJournal article10.1093/rfs/hhae0412024-09-30707304Khomyn, M. [0000-0002-4244-6663]