Smart Beta, 'Smarter' Flows

50 Pages Posted: 3 May 2017 Last revised: 30 Jun 2022

See all articles by Jie Cao

Jie Cao

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

Jason C. Hsu

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

Linjia Song

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

Zhanbing Xiao

The University of British Columbia

Xintong Zhan

Department of Finance, School of Management, Fudan University

Date Written: May 24, 2020

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

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 (May 24, 2020). Available at SSRN: https://ssrn.com/abstract=2962479 or http://dx.doi.org/10.2139/ssrn.2962479

Jie Cao (Contact Author)

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

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

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

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

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Zhanbing Xiao

The University of British Columbia ( email )

Vancouver, British Columbia
Canada

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

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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