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Abstract
ETFs mirror an existing index by holding the same component stocks and matching the weighting scheme. ETFs offer services and investment flexibility that indexed mutual funds generally do not. We expect that if ETFs offer additional benefits over index funds, such as intra-day and option trading, then certain investors should prefer ETFs, leading to a shift in demand from indexed products to ETFs. We test this hypothesis by examining the flow of funds into, and out of, indexed mutual funds that track the S&P 500, and net creation and redemption levels for the ETF Spider. We find that the demand for the Spider has a significantly negative effect on the demand and, thus, the flow of funds of indexed mutual funds. Moreover, the lowest cost mutual fund provider seems to be exempt from this relationship.
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