Relative Liquidity, Fund Flows and Short-term Demand: Evidence from Exchange-Traded Funds
38 Pages Posted: 1 Dec 2013 Last revised: 24 Nov 2017
Date Written: November 22, 2017
We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: i) relative liquidity is significantly more important for short- than for long-term investors; and ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short-term demand.
Keywords: ETF, liquidity clientele, institutional investors, short-term trading
JEL Classification: G10, G14, G23
Suggested Citation: Suggested Citation