ETF ownership and the transmission of monetary policy

This paper examines whether ETFs alter monetary policy transmission to equity markets. Using orthogonalized monetary policy surprises across 101 FOMC meetings (2012–2023), we document that broad market ETF ownership creates asymmetric transmission effects, amplifying returns to expansionary surprises (rate cuts) while dampening responses to contractionary surprises (rate hikes). We find evidence of information transmission from ETFs to underlying markets only following expansionary surprises. Rate cuts create larger demand shocks for ETFs than underlying stocks, increasing ETF premiums that trigger share creation activity. This generates buying pressure on underlying stocks that transmits information from ETFs proportional to their ETF ownership.