Smart Beta, 'Smarter' Flows

Cao, Jie; Hsu, Jason C.; Xiao, Zhanbing; Zhan, Xintong

doi:10.2139/ssrn.2962479

Smart Beta, 'Smarter' Flows

54 Pages Posted: 3 May 2017 Last revised: 1 Apr 2019

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: March 31, 2019

Abstract

We examine the impact of smart beta equity exchange-traded funds (ETFs) on how investors evaluate active mutual fund performance. We find that when smart beta ETFs are actively traded, mutual fund flows become “smarter”, with a higher sensitivity to alphas from multi-factor models. The dominance of the CAPM alpha weakens and even disappears. Our findings highlight the importance of financial innovation in shaping investor behavior and are not explained by alternatives such as investor learning because the results are driven by sophisticated investors. We document consistent evidence using international data and a cross-country analysis.

Keywords: Smart beta ETFs; financial innovation; asset pricing models; mutual fund flows; investor behavior

JEL Classification: G11; G23; G15

Suggested Citation: Suggested Citation

Cao, Jie and Hsu, Jason C. and Xiao, Zhanbing and Zhan, Xintong, Smart Beta, 'Smarter' Flows (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=2962479 or http://dx.doi.org/10.2139/ssrn.2962479