DOL Fiduciary Rule and ETF Performance

Abstract

On April 10, 2016, the U.S. Department of Labor (DoL) Employees Benefits Security Administration finalized a rule to address conflicts of interest for investment advice on individual retirement accounts (IRAs), which is commonly known as the “fiduciary rule”. It is widely expected that since the DOL rule requires financial advisors to act in their clients’ best interests and demands greater clarity on the high costs of active management in retirement accounts, this will prompt advisers to embrace lower cost, passive investment strategies as the preferred portfolio building blocks. ETF industry, as one of the low – cost, index-like investment vehicles is expected to significantly benefit from the rule. In this paper, we empirically test whether the ETF price market reacts positively to the announcement of the DOL rule using the event study method. Our study will then offer significant insights regarding the ETF market reaction to the financial regulations.