Exchange traded funds : is money smart? a study on flow-performance relationship.

Abstract

This paper studies the relationship between investor flow and performance of Exchange Traded Funds (“ETFs”) in the United States (“US”) between 2003 - 2010. Investors often make investment decisions based on the historical performance of an investment asset, implying that a higher historical return may lead to higher flow. Our research, which is focused on ETFs, leads us to the same conclusion. In addition, our research has showed that ETFs that receive higher flow subsequently perform significantly poorer than those that receive lower flow, when style adjustment is incorporated into the analysis. A further investigation reveals that the underperformance could be attributed to high expenses of ETFs.