Exchange-traded funds have grown in popularity among institutional and retail investors, sparking interest among academic researchers as to the sources of their returns vis-à-vis the baskets of securities they represent.

“I’m impressed by the phenomenal growth of the ETF industry,” said Pauline Shum, professor of finance at York University’s Schulich School of Business. “It has achieved the same size as the global hedge fund industry in a span of only 25 years. ETFs offer opportunities for do-it-yourself investors, who are becoming more educated and more sophisticated, by providing them with access to different investment styles and asset classes in a very liquid way.”

Shum, who will moderate an ETF panel at Markets Media’s Canadian Trading & Investing Summit in Toronto on April 1, has focused her research in recent years on the performance of leveraged and international ETFs, and the sources of asset growth in individual ETFs.

“There are a lot of different aspects to ETFs,” Shum said. “There’s the sales part of it, there’s the construction part of it, and there’s the trading part of it. For an institutional money manager choosing whether to buy the ETF or buy the underlying securities, having the ability to compare liquidity among ETFs is very important.”

Research by Shum and her colleagues indicates that individual ETF asset growth is driven not only by asset returns, but also by a host of financial/technical and investor attention variables.

Importantly, the extent of the influence of specific drivers is conditional on an ETF’s growth stage and clientele.

The research suggests that there is a material difference in the driving forces of asset growth between ETFs at different growth stage and with different clientele, even though they provide similar returns to investors. In particular, a mature fund is more likely driven by organic NAV growth, and a new fund is more likely driven by fund characteristics. Further, an institutional dominated fund is more likely driven by technical factors, and a retail dominated fund is more likely driven by investor attention factors.

In addition, the research suggests a clientele effect: the importance of technical factors (such as trading discounts and premiums) and investor attention differ across funds, depending on the extent of institutional ownership. Such a clientele effect might also be of importance in creating brand-level investor attention.

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