Smart beta, “smarter” flows

Jie Cao, Jason C. Hsu, Linjia Song, Zhanbing Xiao and Xintong Zhan

Journal of Empirical Finance, 2025, vol. 81, issue C

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.

Keywords: Smart beta ETFs; Mutual fund flows; Factor model; Friction; Financial innovation (search for similar items in EconPapers)
JEL-codes: G11 G15 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:81:y:2025:i:c:s0927539825000027

DOI: 10.1016/j.jempfin.2025.101580

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