Empirical analysis uncovers heightened flow-performance sensitivity in exchange-traded funds, suggesting institutional momentum trading and model portfolios drive performance chasing.
Performance chasing is pervasive in active mutual funds, index mutual funds, and ETFs, with positive flow-performance sensitivity evident in both broad-based and niche funds and for the skill and nonskill components of returns. The sensitivity of ETFs is greatest, with insignificant differences between active and index mutual funds. The heightened sensitivity of ETFs is not explained by benchmark design or exchange trading, and is amplified by institutional ownership. Institutional trading of ETFs follows a momentum strategy, rather than flow management or benchmarking. Institutional herding and the outsourcing of investment management to model portfolios heightens the performance sensitivity of ETF flows. (JEL G10, G11, G23)
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Dannhauser et al. (2026) studied this question.
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