Does Trading by ETF and Mutual Fund Investors Hurt Performance? Evidence from Time- and Dollar-Weighted Returns

Vol.17, No. 3, 2019
Ananth Madhavan and Aleksander Sobczyk

This paper analyzes the “return gap” between internal rate of returns that account for intermediate investor flows (“dollar-weighted returns”) and more familiar buy-and-hold returns that funds typically must report. Our sample constitutes all US-domiciled open- end mutual funds and exchange-traded funds (ETFs), and covers both fixed income and equity funds, as well as active and index styles of management. We find that return chasing behavior explains the cross-sectional pattern of the return gap. We conclude that high turnover of liquid ETFs does not lead to sub-par returns for investors in these funds.