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Smart beta, “smarter” flows

Author

Listed:
  • Cao, Jie
  • Hsu, Jason C.
  • Song, Linjia
  • Xiao, Zhanbing
  • Zhan, Xintong

Abstract

We document that when smart beta ETFs are more actively traded, mutual fund flow sensitivity to multi-factor alphas increases significantly. This evidence is consistent with a friction hypothesis that active smart beta ETF trading reduces the costs of investing in non-market risk factors (e.g., SMB and HML). Consequently, when this friction is diminished, investors reward mutual fund managers more for multi-factor alphas. We show that the results are driven by sophisticated investors, ruling out behavioral explanations. The results are concentrated among mutual funds with high exposures to non-market risk factors. We further find that the gap between CAPM alpha and multi-factor alphas in explaining flows reduces when smart beta ETFs are actively traded.

Suggested Citation

  • Cao, Jie & Hsu, Jason C. & Song, Linjia & Xiao, Zhanbing & Zhan, Xintong, 2025. "Smart beta, “smarter” flows," Journal of Empirical Finance, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:empfin:v:81:y:2025:i:c:s0927539825000027
    DOI: 10.1016/j.jempfin.2025.101580
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    Keywords

    Smart beta ETFs; Mutual fund flows; Factor model; Friction; Financial innovation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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