Actively managed mutual funds holding passive investments: What do ETF positions tell us about mutual fund ability?

Document Type

Article

Publication Title

Journal of Banking and Finance

Publication Date

3-1-2017

Abstract

We provide the first in-depth examination of exchange-traded funds (ETFs) within actively managed mutual fund (AMMF) portfolios to better understand why AMMFs make substantial investments in passive ETFs. We examine the association between holding ETF positions and AMMF performance, as well as indirect measures of performance, including market timing, flow management, and cash holdings. We find that over one-third of AMMFs take an ETF position between 2004 and 2015. Our results indicate that AMMFs allocating large portions of their portfolio to ETFs perform worse, by between 0.41% and 1.63% annually using various performance measures. These AMMFs also exhibit worse market timing and hold more cash. In contrast, AMMFs that hold ETFs in small amounts have similar characteristics to non-user AMMFs. Therefore, the act of holding an ETF does not signal inferior ability, however, taking large ETF positions does.

Volume

76

First Page

48

Last Page

64

DOI

10.1016/j.jbankfin.2016.11.025

ISSN

03784266

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