Brown-bag Seminar: How Do ETFs Affect Asset Management Industry? How Do ETFs Affect Asset Management Industry?

Research Interest
We examine the impact of non-market tracking ETFs on how investors evaluate mutual fund performance. We rely on mutual fund flow sensitivity to alphas from different factor models to measure investors’ behavior. Our empirical results show that when the non-market tracking ETFs are actively traded, fund flow sensitivity to alphas from three-factor, four-factor, and seven-factor models increases. The dominance of CAPM alpha weakens and even disappears during the high trading volume period of the non-market tracking ETFs. The results are robust to different measures and different empirical methods. Our documented evidence is driven by funds with high exposure to non-market risk factors (SMB and HML) and funds with more sophisticated investors.