Fund Flows and Underlying Returns: The Case of ETFs
30 Pages Posted: 8 Oct 2012 Last revised: 25 Oct 2017
Date Written: March 9, 2017
I investigate the relation between exchange-traded fund (ETF) flows and their underlying securities' returns using a unique fund-level database covering U.S. equity ETFs, adjusted for the flow reporting bias. I document price pressure and price reversal patterns in ETF flow-return relation in panel and aggregate settings, suggesting an economically significant price pressure effect, even when controlling for mutual fund flows which do not exhibit price pressure. At an aggregate level, vector autoregressive (VAR) tests show that 38% of the price change associated with the flow shock corresponds to price pressure and is reversed after five days. These results extend the research concerning the price impact of institutional trades to the novel ETF framework and highlight differences in the market roles of mutual funds and ETFs.
Keywords: ETF, arbitrage, fund, flows, trading volume, VAR, asset basket
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation