ETF Flows, Non-Fundamental Demand, and Return Predictability

58 Pages Posted: 21 Nov 2016 Last revised: 24 Nov 2018

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: November 21, 2018

Abstract

Non-fundamental demand shocks have significant effects on asset prices, but observing these shocks is challenging. We show theoretically and empirically that exchange traded funds (ETFs) provide signals of non-fundamental demand shocks. A long-short portfolio formed on these signals 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 causes ETF investors to systematically mistime their investments, 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 (November 21, 2018). 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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