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Factors of ETF Fund Flows

Student: Voit Artem

Supervisor: Vladimir Sokolov

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Final Grade: 8

Year of Graduation: 2020

This paper is dedicated to the factors affecting the fund flows of exchange-traded funds (ETFs). ETF is financial instrument with significant benefits compared to active investing and “home-made” index tracking, which allowed ETFs to rapidly accumulate assets under management. Given that asset accumulation is the key risk assumed by ETF sponsor, there have been several papers focused on modelling flows. With this paper, we first confirm prior analysis on data for all ETFs (not only equity) for May 2010–May 2020 – in particular, we find evidence for return chasing, arbitrage chasing (i.e. closing the NAV premium gap), and AuM effect. However, we find no support for the significance of expense ratio, while negative impact of average spread has ample evidence on a broad sample. Second, we use the same predictors to study the volatility of the funds flow and find compelling evidence that spreads, expense ratio, AuM, trading volume, and last twelve months return all impact flow volatility. Finally, we replicate the findings on a case study of competitive dynamics of two largest equity ETFs, finding further support for the conclusions of the model.

Full text (added June 11, 2020)

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