Abstract
Exchange-Traded Funds (ETFs) attract style switchers that naively allocate more (less) money to styles that have recently performed well (poorly). I find strong evidence of short-term style momentum trading in ETF flows. Institutional (13-F) investors that use ETFs do not, as a group, trade against style switchers. Instead, I find significant evidence of style momentum trading among institutions classified as having low active share or high portfolio turnover. Short-term style-level demand for ETFs also predicts style-level return reversals, which is distinct from fund-level return predictability. These findings suggest that noise-trader demand for investment styles sometimes pushes prices away from fundamentals.
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