RESEARCH ARTICLE
The flow-performance puzzle: Insights from passive and active ETFs
Hamed Yousefi,
Mohammad Najand,
Licheng Sun,
Corresponding Author
Hamed Yousefi
Department of Finance, Drew University, Madison, NJ, USA
Correspondence
Hamed Yousefi, Department of Finance, Drew University, 36 Madison Ave., Madison, NJ 07940, USA.
Email: [email protected]
Search for more papers by this authorMohammad Najand
Department of Finance, Old Dominion University, Strome College of Business, Norfolk, VA, USA
Search for more papers by this authorLicheng Sun
Department of Finance, Old Dominion University, Strome College of Business, Norfolk, VA, USA
Search for more papers by this authorHamed Yousefi,
Mohammad Najand,
Licheng Sun,
Corresponding Author
Hamed Yousefi
Department of Finance, Drew University, Madison, NJ, USA
Correspondence
Hamed Yousefi, Department of Finance, Drew University, 36 Madison Ave., Madison, NJ 07940, USA.
Email: [email protected]
Search for more papers by this authorMohammad Najand
Department of Finance, Old Dominion University, Strome College of Business, Norfolk, VA, USA
Search for more papers by this authorLicheng Sun
Department of Finance, Old Dominion University, Strome College of Business, Norfolk, VA, USA
Search for more papers by this authorFirst published: 28 April 2024
Abstract
This study examines the relationship between fund flows and subsequent performance, testing the smart money and price pressure hypotheses within the context of passive and active exchange-traded funds (ETFs). By differentiating between managerial skill and non-fundamental demand shocks, we uncover a significant positive flow-performance relationship, challenging traditional attributions solely to investor skill in identifying superior fund management. We further develop a measure of flow shocks to individual stocks by aggregating daily changes in ETF ownership of 5600 stocks. An event study on ETF constituents further disentangles the effects of price pressure from smart money. Through robust analyses, including Fama–French industry portfolios and propensity score matching, our findings suggest a nuanced interaction between investor behaviour and market dynamics, contributing to the discourse on fund flows' impact on performance. This research highlights the complexity of the flow-performance relationship and its implications for fund management and investment strategies, offering new insights into the mechanisms driving fund performance in the ETF landscape.
Open Research
DATA AVAILABILITY STATEMENT
All data is available through ETFG and CRSP databases under the WRDS subscription.
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