Are the Flows of Exchange-Traded Funds Informative?

Abstract

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 macro news while the demand- and arbitrage-driven components are not closely related to forthcoming news.

Keywords: Authorized Participant, Exchange-Traded Fund (ETF), Information Asymmetry, Macro News

JEL Classification: G12, G14