ETF Flows, Non-Fundamental Demand, and Return Predictability

52 Pages Posted: 21 Nov 2016 Last revised: 29 Jun 2019

See all articles by David C. Brown

David C. Brown

University of Arizona - Department of Finance

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: June 26, 2019

Abstract

Non-fundamental demand shocks have significant effects on asset prices, but observing these shocks is challenging. We show theoretically and empirically that flows into exchange traded funds (ETFs) provide signals of non-fundamental demand shocks. A portfolio which is short high flow ETFs and long low flow ETFs earns excess returns of 1% to 4% per month, consistent with non-fundamental demand distorting asset prices away from fundamental values. Moreover, non-fundamental demand imposes non-trivial costs on ETF investors, leading to underperformance. Our findings show ETFs provide a novel laboratory for studying non-fundamental demand shocks from a broad cross-section of investors.

Keywords: Exchange Traded Funds (ETFs), Investor Flows, Non-Fundamental Demand, Return Predictability

JEL Classification: G12, G14

Suggested Citation

Brown, David C. and Davies, Shaun and Ringgenberg, Matthew C., ETF Flows, Non-Fundamental Demand, and Return Predictability (June 26, 2019). Available at SSRN: https://ssrn.com/abstract=2872414 or http://dx.doi.org/10.2139/ssrn.2872414

David C. Brown

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-626-0746 (Phone)

HOME PAGE: http://www.davidclaytonbrown.com

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Matthew C. Ringgenberg

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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