Conference Agenda

Active exchange-traded funds (AETFs) have grown rapidly despite the decline of poor-performing active mutual funds (AMFs). AETFs’ growth, however, is not due to superior performance. In fact, AETFs have significantly worse performance than AMFs. Rather, AETFs are taking advantage of the attention-driven trading behavior of retail investors. Similar to equity investors, AETF investors chase extreme short-term returns, both positive and negative, while long-term flows have no response to underperformance. Managers respond to these payoffs by taking high risks to generate extreme returns. Overall, our results show how active management has responded to the decline of their traditional distribution

channel.

This paper documents substantial asset `reclassification' in the mutual fund industry, exceeding $450 billion in 2021. These reclassification events do not involve investor flows; instead, mutual fund assets are simply converted into twin investment vehicles, such as separate accounts or collective investment trusts. Analyzing the implications of asset reclassification for the mutual fund literature, we find that these events distort inferred mutual fund flows without reflecting actual asset movements at the investment product level. Failing to account for asset reclassification in flow-based regression analyses can lead to biased estimates, as it resembles a non-classical measurement error. We first analyze scenarios in which mutual fund flows serve as a dependent variable, focusing on flow-performance sensitivity. A regression utilizing reclassification-adjusted quarterly flows demonstrates a 40-100% greater flow-performance sensitivity for mutual funds with twin vehicles than one employing unadjusted flows. We then examine cases when flows serve as an independent variable, as in `smart money' tests, where measurement error artificially inflates true estimates.