ETFs as a disciplinary device

Yuet Chau, Karamfil Todorov and Eyub Yegen

No 1261, BIS Working Papers from Bank for International Settlements

Abstract: We document a unique feature of active exchange-traded funds (AETFs): they serve as a disciplinary tool for investors to remove underperforming managers. Unlike mutual fund shares, AETF shares can be shorted, allowing any investor to take a position against underperforming AETF managers. We show that AETFs exhibit over five times greater flow-performance sensitivity than mutual funds, indicating that AETF managers face harsher penalties for poor performance. Investors actively short-sell shares of AETFs managed by underperforming managers, ultimately driving their departure. AETFs’ unique short-selling mechanism reduces frictions in active fund management, enabling more efficient allocation of capital to high-performing managers.

Keywords: ETF; mutual funds; performance; flow; active fund management (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G20 G23 (search for similar items in EconPapers)
Date: 2025-04
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