Smart Beta, 'Smarter' Flows

Abstract

Using U.S. and global data, we examine the impact of Smart Beta ETFs on active mutual funds. As Smart Beta ETFs become widely available and actively traded, active mutual fund flows become “smarter”, that is they become more sensitive to multi-factor alphas. Our findings demonstrate how product innovation changes investor behavior and the investment ecosystem. Specifically, multi-factor analyses have become more relevant in performance attribution, and closet factor funds have become targets for replacement by low-cost Smart Beta ETFs.

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

JEL Classification: G11; G23; G15