Exchange traded funds : a study on the performance-flow relationship.

This paper studies the flow of funds into and out of domestic equity Exchange-Traded Funds (ETFs) in the United States. Investors use historical returns to make their decisions on fund investment or divestment. They do so asymmetrically by investing more in funds that provided superior returns in the prior period but fail to divest from funds that were in the worst-performing group. This positive relationship holds in both periods of high and low market performance, and it is driven strongly by the 2007 to 2010 sub-period in this study. Also, such an effect persists for the first quarter and then dissipates in the subsequent time periods. In addition, investors in ETFs do not seem to chase star performers within the same-style group, defined by their factor betas or the underlying index they track.BUSINES