Are the flows of exchange-traded funds informative?

This paper provides novel evidence of information asymmetry in exchange-traded fund (ETF) markets. By decomposing daily ETF flows, we find that the unexpected flow component, orthogonal to the components driven by market making and arbitraging, wields substantial power in predicting next day's ETF returns. Informed traders are able to exploit their information advantage to realize an annualized open-to-close return of 19.16% or close-to-close return of 22.42%. The informativeness of the unexpected ETF component is further confirmed by its strong power of predicting next day's macroeconomic and ETF-related news, while the market-making- and arbitraging-driven components are not closely related to forthcoming news. KEYWORDS authorized participant, exchange-traded fund (ETF), information asymmetry, public news JEL CLASSIFICATION G12.G14
1 | INTRODUCTION Most exchange-traded funds (ETFs) are passive investment vehicles that track their designated market indexes. (1) Is information asymmetric in these markets of passive composite securities? Is it [...]