Actively managed mutual funds holding passive investments: What do ETF positions tell us about mutual fund ability?

Sherrill, D. Eli; Shirley, Sara E.; Stark, Jeffrey R.

doi:10.1016/j.jbankfin.2016.11.025

Cited by 36 publications

(15 citation statements)

References 28 publications

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“…Moreover, less sophisticated institutions own a relatively large fraction of outstanding ETF shares (14%) relative to more sophisticated institutions (5%), which suggests that the sample of institutional ETF users is tilted toward less sophisticated institutions. These results agree with Joenväärä and Salehi (2018) and Sherrill et al (2017), who show that institutional investors that use ETFs underperform institutions that do not.…”

Section: Discussionsupporting

confidence: 91%

“…The overall sample of institutional ETF users is also tilted toward less sophisticated institutions that own a relatively large fraction of outstanding shares (14%) relative to the most sophisticated institutions (5%). My results therefore align with previous studies suggesting that institutional ETF users are less sophisticated, on average, relative to institutions that do not use ETFs (Joenväärä andSalehi (2018), Sherrill, Shirley, andStark (2017)).…”

Section: Introductionsupporting

confidence: 89%

“…The lack of sophistication among institutional ETF users has precedence in the existing literature. Joenväärä and Salehi (2018) and Sherrill et al (2017) show that institutional investors that use ETFs underperform institutions that do not. My results also agree with Edelen et al (2016), who find that institutions trade contrary to several well-known asset pricing anomalies.…”

Section: B Institutional Investor Sophistication and Style-momentum T...mentioning

confidence: 99%

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Naïve Style-Level Feedback Trading in Passive Funds

Broman

2021

J. Financ. Quant. Anal.

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Passive exchange-traded funds (ETFs) are ideally suited to style-level feedback trading because of their high liquidity, ease of short selling, and pure play on investment styles. I find strong evidence of short-term style-momentum trading in ETFs. Institutional investors that use ETFs do not act as arbitrageurs by trading against style momentum. Institutions, especially less sophisticated ones, are themselves style-momentum traders. Moreover, recent style-level demand predicts style-level return reversals. These findings suggest that uninformed positive feedback trading by less sophisticated market participants can destabilize financial markets in the short run.

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Section: Discussionsupporting

confidence: 91%

Section: Introductionsupporting

confidence: 89%

Section: B Institutional Investor Sophistication and Style-momentum T...mentioning

confidence: 99%

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Naïve Style-Level Feedback Trading in Passive Funds

Broman

2021

J. Financ. Quant. Anal.

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“…If they hoard cash in response to redemptions, then they will amplify fire sales. Sherrill, Shirley, and Stark (2017) show that their sample funds also exhibit worse market timing and hold more cash. Chaderina and Scheuch (2018) present that redemptions following bad performance pose no dilution risk to the remaining investors, and what appears to be liquidity management by the funds is actually managers collecting rent.…”

Section: Literature Reviewmentioning

confidence: 99%

Regime switching dynamics in mutual fund cash holdings, risk, and size threshold effect

Lee

2020

Int. J Fin Econ

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This paper examines the relationships among cash holdings, fund risk, fund turnover, and market risk for equity funds over the period 2007–2017 under the scale effect threshold. From the empirical results of the panel smooth transition regression (PSTR) model, cash holdings and scale effect in equity funds are indeed non‐linear relationship. The findings show that the relationships among cash holdings, fund risk, fund turnover, and market risk differ widely based on taking into account the scale effect.

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“…as well as from mutual fund holdings disclosures (Agarwal et al, 2014(Agarwal et al, , 2015Parida and Teo, 2018;Schwarz and Potter, 2016). The use of mutual fund holdings data in academic research has led to findings demonstrating the biases and performance impacts that arise in strategic decisions by fund managers to hold derivatives (Koski and Pontiff, 1999;Deli and Varma, 2002;Natter et al, 2016) in socially responsible investments (Goldreyer et al, 1999;El Ghoul and Karoui, 2017), and in exchange-traded products (Sherrill et al, 2017;Rakowski et al, 2017).…”

mentioning

confidence: 99%

Mutual fund research: a perspective on how we have arrived at the current state of academic research on mutual funds

Diltz

Rakowski²

2018

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Guest editorial Mutual fund research: a perspective on how we have arrived at the current state of academic research on mutual funds Mutual funds have existed in one form or another since the eighteenth century, although the first modern mutual fund was created in 1924. By 2016, over $40 trillion was invested in mutual funds worldwide (Investment Company Institute, ICI, 2017). No doubt, much of the recent growth in mutual funds corresponds to the demise of the defined benefit pension plan in the USA in favor of the 401(k) and other defined contribution plans, as well as similar trends worldwide. The academic literature in this area is, of course, substantial. Early work demonstrated that the benefits of active portfolio management are far from obvious (Jensen, 1968). Jensen's work laid out the methodology of measuring a mutual fund's performance via the intercept from the regression of a fund's return on a benchmark. Jensen's finding of negative estimated "alphas" raised questions about the skill of mutual fund managers and the rationality of investors. The following decades witnessed extensive work to explain when, how, and why investors should, or should not, pursue professionally and actively managed portfolios. The financial services industry responded with the launch of low-cost index funds (Hortaçsu and Syverson, 2004; Bogle, 2002, 2016) and new marketing efforts to justify active management (Jain and Wu, 2000; Chen et al., 2000). Investors responded in two divergent ways: by directing increasing wealth to new passive investment strategies (ICI, 2017; Gruber, 1996), and by investing in alternative actively managed choices, such as hedge funds (Fung et al., 2008). The continuing flow into seemingly underperforming actively managed mutual funds was a conundrum for academic researchers in the 1980s and 1990s. Financial economists attempted to explain the inconsistency by asserting the existence of potential problems with the data and methods used to measure performance (

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Actively managed mutual funds holding passive investments: What do ETF positions tell us about mutual fund ability?

Cited by 36 publications

References 28 publications

Naïve Style-Level Feedback Trading in Passive Funds

Naïve Style-Level Feedback Trading in Passive Funds

Regime switching dynamics in mutual fund cash holdings, risk, and size threshold effect

Mutual fund research: a perspective on how we have arrived at the current state of academic research on mutual funds

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