Passive Pressure: How ETF Flows Affect Stock Returns in the S&P 500

Abstract

Passive ETF flows provide a useful setting for studying non-fundamental demand shocks in equity markets. This thesis examines whether such flows create stock-level price pressure among S&P 500 constituents. Using quarterly data from 2015 to 2025, we allocate fund-level ETF flows to the 15 largest and 15 smallest S&P 500 holdings using lagged portfolio weights and scale the resulting pressure by dollar trading volume. The results show that ETF-induced pressure is positively associated with contemporaneous returns for large constituents, while no significant effect is found for the smaller constituents. The return response persists into the following quarter before reversing two quarters later, suggesting temporary price pressure rather than permanent information-based effects. Higher passive exposure is associated with a weaker marginal price response, indicating that passive ownership also reflects firm size and market depth.