Smart Beta, 'Smarter' Flows

Abstract

We document that when smart beta ETFs are more available, the dominance of the CAPM alpha in explaining active mutual fund flows disappears. This phenomenon is driven by an increased sensitivity of mutual fund flows to alphas from multi-factor models. Such evidence indicates that mutual fund investors focus more on multi-factor alphas when smart beta ETFs provide low-cost factor exposures. Cross-sectional analyses and Granger causality tests lend further support to our argument. Our findings highlight the importance of financial innovation in shaping investor behavior.

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

JEL Classification: G11; G23; G15