Abstract
New money flow is known as the measure of skill in mutual funds. We investigate the flow-performance relationship in the laboratory of passive Exchange-Traded Funds (ETFs) and find a positive and significant relationship in the absence of the managerial skill. We further show that active ETFs exhibit greater persistence and more pronounced results. Exploring the effect of daily flow shocks on ETF holdings, we disentangle non-fundamental demand from information-based demand. Our results suggest that price pressure” can fully explain the positive flow-performance relation with passive ETFs, while it only explains half of the same phenomena with active funds. Consequently, even though “smart money” exists, flow may not be a pure proxy for skill.
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