Corporate bond exchange-traded funds (ETFs) impact firms’ investments and bond valuations. Exogenous index rule changes establish a causal link between ETF ownership and R&D spending, particularly for financially constrained firms. As to the mechanisms, ETF ownership leads to a decrease in firms’ cost of debt, provides a buffer for bond prices following large fund outflows, and is associated with a loosening of covenants restricting risky investments. These changes likely enable financially constrained firms to capitalize on their internal growth opportunities. A theoretical model incorporating the institutional features of bond ETFs further demonstrates that firms’ R&D expenditures and equity value are higher in the presence of passive investors.