Tail-Risk Hedging, Dividend Chasing, and Investment Constraints: The Use of Exchange-Traded Notes by Mutual Funds

Journal of Empirical Finance, 44, pp.91-107.

Posted: 7 Jun 2016 Last revised: 30 Mar 2018

See all articles by David A. Rakowski

David A. Rakowski

University of Texas at Arlington

Sara Shirley

Middle Tennessee State University

Jeffrey Stark

Middle Tennessee State University

Date Written: August 29, 2017

Abstract

Our study examines mutual fund demand for a newly designed security, exchange-traded notes (ETNs). We find strong evidence that mutual fund long positions in ETNs significantly underperform and that the motivations to hold ETNs lie outside of maximizing returns. Mutual funds hold ETNs to hedge tail risk and to gain access to higher dividend yields. Mutual funds have a strong preference for derivative-like ETNs although this preference is unrelated to contractual constraints. Finally, we show that skilled timing of ETN investments is limited to the short-sales market.

Keywords: Exchange Traded Notes, Mutual Funds, Financial Innovation, Portfolio Management

JEL Classification: G11, G23, G20

Suggested Citation

Rakowski, David A. and Shirley, Sara and Stark, Jeffrey, Tail-Risk Hedging, Dividend Chasing, and Investment Constraints: The Use of Exchange-Traded Notes by Mutual Funds (August 29, 2017). Journal of Empirical Finance, 44, pp.91-107., Available at SSRN: https://ssrn.com/abstract=2790590 or http://dx.doi.org/10.2139/ssrn.2790590

David A. Rakowski (Contact Author)

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

Sara Shirley

Middle Tennessee State University ( email )

Murfreesboro, TN 37132
United States

Jeffrey Stark

Middle Tennessee State University ( email )

Murfreesboro, TN
United States

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