What Drives ETF Flows?


  • We thank Xin Hong and Monika Rabarison for valuable research assistance.


The value of exchange traded fund (ETF) assets has increased from $66 billion in 2000 to almost a trillion dollars in 2010. We use this massive expansion in ETF assets to study what drives ETF flows. Using a data set of over 500 ETFs from 2001 to 2010, we show that ETF investors chase returns in the same way as mutual fund investors. While there is an active debate about whether return chasing by mutual fund investors represents the pursuit of superior talent, the existence of return chasing in this passively managed environment should not represent a search for skilled managers. We also show that ETF flows increase following high volume, small spreads, and high price/net asset value ratios. Finally, we find little evidence of superior market timing in ETF flows. Our results suggest that return chasing in both mutual funds and ETFs is more likely the result of naïve extrapolation bias on the part of investors that has contributed to the growth of the ETF industry.