The Effect of ETF Investments on Underlying Assets

This paper examines the impact of passive Exchange-Traded Funds (ETFs) on the underlying stocks of the Euro Stoxx 50 index. While most of the existing literature focuses on the U.S. market, we analyze the European ETF landscape using proprietary aggregated ETF flow data to assess their influence on stock returns and trading volumes. Our empirical findings reveal that daily ETF flows have a limited impact on stock returns, with positive ETF inflows showing only a weak positive effect, while outflows appear statistically insignificant. However, we find that ETF ownership and index weight negatively impact stock returns, suggesting that passive investing can influence price formation through structural demand effects. In contrast, ETF inflows significantly increase trading volumes, confirming that ETFs enhance market liquidity. This highlights their dual role in price discovery and market efficiency. JEL Codes: G12, G14, G23 Keywords: ETF flows, price impact, trading volume, Euro Stoxx, passive investment.