Smart Beta, 'Smarter' Flows

46 Pages Posted: 3 May 2017 Last revised: 11 Oct 2023

See all articles by Jie Cao

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance

Jason C. Hsu

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

Linjia Song

School of Management, Xiamen University

Zhanbing Xiao

Harvard University

Xintong Zhan

Department of Finance, School of Management, Fudan University

Date Written: October 7, 2023

Abstract

We document that when smart beta ETFs are more actively traded, mutual fund flow sensitivity to multi-factor alphas increases significantly. The increased flow sensitivity to multi-factor alphas is concentrated among funds with high exposure to non-market risk factors (e.g., SMB and HML) and funds with high investor sophistication. This pattern is absent when we replace smart beta ETFs with market ETFs or index mutual funds. The evidence suggests that mutual fund investors focus more on multi-factor alphas when smart beta ETFs provide low-cost factor exposures. Granger causality tests confirm that the activeness of smart beta ETFs leads the changes in flow-performance sensitivity.

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

JEL Classification: G11; G23; G15

Suggested Citation

Cao, Jie and Hsu, Jason C. and Hsu, Jason C. and Song, Linjia and Xiao, Zhanbing and Zhan, Xintong, Smart Beta, 'Smarter' Flows (October 7, 2023). Available at SSRN: https://ssrn.com/abstract=2962479 or http://dx.doi.org/10.2139/ssrn.2962479

Jie Cao (Contact Author)

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/jiejaycao

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Linjia Song

School of Management, Xiamen University ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Zhanbing Xiao

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Xintong Zhan

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

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