Actively Managed Mutual Funds Holding Passive Investments: What Do ETF Positions Tell Us About Mutual Fund Ability?

61 Pages Posted: 8 Jan 2016 Last revised: 30 Nov 2016

D. Eli Sherrill

Illinois State University

Sara E. Shirley

Roger Williams University

Jeffrey R. Stark

Bridgewater State University

Date Written: November 28, 2016

Abstract

We provide the first in-depth examination of exchange-traded funds (ETFs) within actively managed mutual fund (AMMF) portfolios to better understand why AMMFs make substantial investments in passive ETFs. We examine the association between holding ETF positions and AMMF performance, as well as indirect measures of performance, including market timing, flow management, and cash holdings. We find that over one-third of AMMFs take an ETF position between 2004 and 2015. Our results indicate that AMMFs allocating large portions of their portfolio to ETFs perform worse, by between 0.41% and 1.63% annually using various performance measures. These AMMFs also exhibit worse market timing and hold more cash. In contrast, AMMFs that hold ETFs in small amounts have similar characteristics to non-user AMMFs. Therefore, the act of holding an ETF does not signal inferior ability, however, taking large ETF positions does.

Keywords: Mutual Funds, Exchange Traded Funds, ETFs, Mutual Fund Performance, Portfolio Management

JEL Classification: G11, G20, G23

Suggested Citation

Sherrill, D. Eli and Shirley, Sara E. and Stark, Jeffrey R., Actively Managed Mutual Funds Holding Passive Investments: What Do ETF Positions Tell Us About Mutual Fund Ability? (November 28, 2016). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2712677 or http://dx.doi.org/10.2139/ssrn.2712677

D. Eli Sherrill

Illinois State University ( email )

Normal, IL 61790
United States

Sara E. Shirley

Roger Williams University ( email )

Bristol, RI 02809
United States

Jeffrey R Stark (Contact Author)

Bridgewater State University ( email )

Bridgewater, MA 02325
United States

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