Dynamic Connectedness and Systemic Risk in Equity ETFs

DOI

10.2991/978-94-6239-772-9_9How to use a DOI?

Keywords

Exchange-traded funds (ETFs); TVP-VAR; financial connectedness; spillover effects; systemic risk; network analysis; diversification; portfolio management

Abstract

Exchange-traded funds now account for a substantial share of global equity allocation, yet most connectedness research has examined narrow ETF segments -commodities, energy, or volatility products -rather than the cross-category equity ETF system that investors actually hold. This paper estimates dynamic spillovers across 25 major US-listed equity ETFs spanning broad-market, growth, value, size, sectoral, international developed, and emerging-market exposures from February 2016 to February 2026. Using a TVP-VAR framework with Generalized Forecast Error Variance Decomposition, complemented by rolling-correlation and network analysis, we document three results. First, the ETF system is structurally highly connected: cross-market spillovers account for 93.84% of forecast error variance on average, peaking at 96% during the March 2020 COVID shock. Second, influence is concentrated rather than distributed. VTI, SPY, VOO, and IVV consistently transmit more shocks than they absorb and occupy the central positions in the network across all three centrality measures, while sectoral and emerging-market ETFs (notably XLE, VWO, IEMG) are net receivers. Third, diversification benefits weaken precisely when investors most need them: correlations between SPY and international, emerging-market, and sector ETFs rose sharply during COVID and only partially reverted afterward. The findings indicate that the contemporary equity ETF ecosystem is organized as a benchmark-centred core-periphery network, with implications for portfolio construction and systemic-risk monitoring as passive investment vehicles continue to grow.

Copyright

© 2026 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Fozia Mehtab
PY  - 2026
DA  - 2026/09/07
TI  - Dynamic Connectedness and Systemic Risk in Equity ETFs
BT  - Proceedings of the 2nd International Conference on Innovations and Challenges in Financial Technology (ICICFT 2025)
PB  - Atlantis Press
SP  - 92
EP  - 114
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6239-772-9_9
DO  - 10.2991/978-94-6239-772-9_9
ID  - Mehtab2026
ER  -