Abstract
We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying securities, are particularly attractive to short-term investors. We find that liquidity is an important determinant of weekly and monthly net fund flows, but not quarterly net flows, suggesting that liquidity is important for short-term trading. We further document a liquidity clientele amongst institutional investors: i) their buys and sells are positively related to ETF liquidity; ii) liquidity is significantly more important for short- than for long-term investors; and iii) liquidity is inversely related to the fund’s average holding period.
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