Changes in the liquidity of closed-end country funds after the introduction of World Equity Benchmarks

Abstract

In 1996, the first exchange-traded funds (ETFs) designed to track a subset of the Morgan Stanley Capital International country indices were approved under the name World Equity Benchmarks (acronym “WEBS”TM). We examine the impact of early WEBStrading on the liquidity of corresponding closed-end country funds (CECFs), previously one of the main avenues for retail investors to achieve country-specific equity exposure. We document a decline in both the trading volume and the trading frequency for CECFs, suggesting that some investors migrate to WEBS. At the same time, the market depth for CECFs increases and the bid-ask spread for CECFs decreases following the introduction of WEBS. Our results support the hypothesis that despite the decline in volume and trading frequency, the liquidity of CECFs is favorably affected by the advent of WEBS.