DOES TRADING BY ETF AND MUTUAL FUND INVESTORS HURT PERFORMANCE? EVIDENCE FROM TIME- AND DOLLAR-WEIGHTED RETURNS

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.