Are socially responsible exchange-traded funds paying off in performance?

This study examines the Socially Responsible (SR) exchange-traded funds (ETFs) by comparing their risk-adjusted performance with a matched group of conventional ETFs in the U.S. equity market. In contrast to prior studies that focus on actively managed mutual funds, we find that the risk-adjusted returns of SR ETFs are significantly lower than those of conventional ETFs during the 2005–2020 period. Such underperformance is only observed in non-crisis periods but not in economic crisis periods (i.e., the 2020 pandemic recession and 2008 financial turmoil). We attribute the observed underperformance of SR ETFs during the non-crisis periods to their limited diversification of unsystematic risks resulting from various negative or positive screens employed in the funds. We also find that net fund flows of the SR ETFs are less sensitive to past negative performance than are conventional fund flows. Collectively, our findings suggest that, instead of seeking wealth maximization, socially conscious investors may choose SR ETFs to gain non-economic utility.     

Institutional investors and international investments in emerging economy firms: A behavioral risk perspective

While the extant literature has examined the influence of controlling and non-controlling principals on the internationalization decisions of emerging market firms, heterogeneity among non-controlling principals is largely ignored. The risk characteristics of different groups of owners, shaped by their institutional environments, could contribute to the differences in their preferences for firm internationalization. In this paper, we draw insights from institutional theory and behavioral risk perspective to examine the risk propensities and risk perceptions of various non-controlling principals, such as pressure-resistant (FIIs and mutual funds) and pressure-sensitive (banks, insurance companies and lending institutions) institutional investors. Empirical results from a sample of 2364 unique Indian firms during the 2005–2014 time-period show that, after controlling for firm-level resources and capabilities identified in prior literature, the ownership share of different types of institutional investors is associated with firms’ international investments differently. While pressure-sensitive institutional investors, such as banks and insurance companies, are not supportive of foreign investments by firms, pressure-resistant institutional investors, such as FIIs and mutual funds, are supportive of this strategic decision. Furthermore, our results show that the family ownership in a firm (measured in terms of family shareholding) further lowers the preference of pressure sensitive institutional investors for internationalization, whereas family ownership positively moderates the pressure resistant investors towards internationalization.     

Climate change shocks and socially responsible investments

Climate change's impact on investor behavior is a scantly investigated area in finance. This paper examines the performance of socially responsible exchange trade funds (ETFs) concerning conventional ETFs, in response to climate change events. We proxy climate change signals with a list of natural disaster events that NASA scientists relate to climate change. We contribute to existing literature, by using a very extensive information set of ETF strategies, not influenced by rating agencies' subjective evaluation policies, and covering almost 90% of the universe of worldwide sustainability thematic-oriented ETFs. This sample allows us to identify the socially responsible investment behavior in response to unpredictable climate change shocks. Our identification strategy accounts for endogeneity concerns and relies on two-stage least square (2SLS) approach finding that responsible investors react to climate change events by purchasing socially responsible investments. The relationship between climate change signals and return of investment in themes linked to the development of sustainability is positive. Interestingly enough, the sign of this relationship is different, when we disentangle the empirical results according to the asset type, confirming that investors shift their investments from equity funds to bond funds when market sentiment worsens. Our results indicate that policymakers should increase the support of firms adopting environmentally conscious business practices, while managers should boost a sustainable business strategy.     

Testing the Tracking Efficiency of Commodity Exchange Traded Funds (ETFs) across the Bearish and Bullish Market Regimes: Evidence from Indian Gold ETFs

Commodity exchange traded funds (ETFs) help investors gain exposure to the underlying commodity in digital form. The present article attempts to examine the performance characteristics of 12 gold ETFs in India across the bear and bull markets. ETFs’ sensitivity to their underlying asset (gold prices) is observed to be lower during the bearish market regime, and, as such, the tracking error is found to be higher during the bearish market regime. Further, volume is reported to bear a significant positive impact on the tracking ability of ETFs whereas volatility and pricing deviation are found to negatively impact the tracking ability of ETFs.     

Do Shareholders Have Obligations to Stakeholders?

The question of whether, and to what extent, business managers have obligations to stakeholders has been the principal theme in much of recent business ethics literature. The question of whether shareholders have obligations to stakeholders, however, has not been addressed sufficiently. I provide some needed attention to this matter by examining the positions of shareholders in the contemporary world of investing. Their positions are considerably different than that often envisioned by business ethicists and economists where shareholders determine the directions of corporate activities through their voting decisions. Typical contemporary investors rarely control corporate activities. If they own corporate securities directly, generally they own too small an interest to exercise control. And, in most cases, they do not even own corporate securities directly, but, rather, own shares in funds. Because of the positions of shareholders today, it is highly questionable whether most have obligations to stakeholders. This has a significant implication for business managers. Whether or not shareholders have obligations to stakeholders, business managers have a greater obligation to educate shareholders about how corporate activities affect stakeholders. I provide a justification for that obligation and comment on how business managers might begin to fulfill it.     

On the failure of mutual fund industry regulation

Mutual funds grant retail investors access to professional asset management and facilitate exposure to financial markets. The academic literature and regulators have traditionally focused on issues such as portfolio diversification, performance, liquidity, and management fees in attempts to analyze and improve market efficiency. Scarce attention has been paid to market risk management. There is unanimity on this issue throughout the world. The lack of regulatory attention creates a gap, which is partially covered by mutual fund rating agents and asset management analysts. Those agents base their ratings on various rating methodologies — which engenders a wide array of difficulties, especially for retail investors. We employ proprietary data on historic mutual fund ratings in Israel and show that retail investors do not necessarily benefit from this diversity of opinions. Furthermore, we find that the voluntary implementation of quantitative risk measurement techniques by certain mutual funds tends to be associated with fewer outflows and greater inflows in these funds. Interestingly, the application of (backward-looking) value-at-risk analysis is associated with fewer outflows, while (forward-looking) stress-testing techniques are associated with greater inflows. Given the similarity of mutual fund industry environments across the globe, our results have worldwide applicability.     

Evaluating the performance of global emerging markets equity exchange-traded funds

We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques.     

MUTUAL FUND PORTFOLIO CHOICE IN THE PRESENCE OF DYNAMIC FLOWS

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction‐of‐fund fees. The presence of dynamic flows induces “flow hedging” portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher‐fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.     

Exchange Traded Funds and Stock Market Volatility

This study investigates the relationship between the volatility of stock market indexes and the trading volumes of their exchange traded funds (ETFs). Using both ordinary least squares and generalized autoregressive conditional heteroskedasticity approaches, we demonstrate that the contemporaneous trading volume of S&P 500 ETFs is a key determinant of S&P 500 volatility at both monthly and daily frequencies. Vector autoregressive estimation on the other hand suggests a two‐way Granger causality between S&P 500 volatility and the trading of S&P 500 ETFs. A replication analysis of other market indexes and the corresponding ETFs tracking these indexes confirms that these findings are robust.     

不同基金组织形式下管理人行为的博弈分析

建立了基金管理人与投资者之间的不完全信息动态博弈模型,用以说明不同基金组织形式下基金管理人行为选择的差异。研究认为管理人的行为选择是其相机抉择的结果,开放式基金制度是否对管理人有更强约束力,取决于监督机制、声誉机制、管理人收入方案等因素。在模型分析的基础上,提出了减轻管理人机会主义行为的制度设计方案。     

Investment with a Conscience: Examining the Impact of Pro-Social Attitudes and Perceived Financial Performance on Socially Responsible Investment Behavior

This article addresses the growing industry of retail socially responsible investment (SRI) profiled mutual funds. Very few previous studies have examined the final consumer of SRI profiled mutual funds. Therefore, the purpose of this study was to, in an exploratory manner, examine the impact of a number of pro-social, financial performance, and socio-demographic variables on SRI behavior in order to explain why investors choose to invest different proportions of their investment portfolio in SRI profiled funds. An ordinal logistic regression analysis on 528 private investors revealed that two of the three pro-social variables had a positive impact on how much the consumer invested in SRI profiled funds. Moreover, there was proof of a non-altruistic motive for investing in SRI as consumers who perceive that financial return of SRI is equal or better than “regular” mutual funds, invested a greater proportion of their portfolio in SRI profiled mutual funds. Furthermore, the results showed that women and better-educated investors were more likely to invest a greater proportion of their investment portfolio in SRI. Overall, the findings indicate that both financial perceptions and pro-social attitudes are connected to consumer investment in SRI.     

The Business Ethics of Short Selling and Naked Short Selling

The controversy over short selling has continued unabated from the introduction of modern equity trading in Amsterdam in 1610 to the present day. Nevertheless, the business ethics literature has not really addressed short selling. Short sellers not only profit from the misery of others, they also create it through their selling activities. However, they also provide a socially useful service by making prices better reflect true values, protecting other investors from purchasing overpriced securities. Short sellers can also help to provide liquidity in the markets. Recently, there has been a hue and cry against so called “naked” short selling, which involves not delivering the shares that have been sold. This gives manipulators a tool for depressing stock prices and deprives purchasers of voting rights and potential stock lending revenue. Naked short selling creates ethical issues for short sellers, buyers, brokers, market makers, and regulators. Is it ethical to exploit a legal loophole that permits sellers to sell stock and delay delivering shares indefinitely?     

Management structure and the performance of funds of mutual funds

A rapidly growing mutual fund category is funds of funds (FOFs) which invest in other mutual funds instead of individual securities. This study reports on FOFs' characteristics and performance relative to traditional equity mutual funds and finds that FOFs compare favorably. FOFs with identified managers outperform their unidentified counterparts, and FOFs that invest in-family outperform both traditional equity funds and those FOFs investing out-of-family. Finally, replicating FOFs' holdings can be prohibitively expensive since they commonly hold funds with high minimum initial investments, closed funds and/or funds that are restricted to a particular investor type.     

Socially responsible mutual fund exit decisions

This paper studies, for the first time, socially responsible (SR) mutual fund exits. We analyse a sample of 534 U.S. SR equity mutual funds in the period 2003–2017, in which 182 exit events occurred (53 liquidations, 109 mergers within the same family, and 20 mergers across different families). The results obtained indicate that both liquidations and mergers are more likely among smaller funds that suffer net money outflows in the previous year to the event. At the family level, mergers are more frequent in outperforming families with a larger number of funds, whereas liquidations occur in families with a lower number of funds. When comparing mergers within the same family with mergers across different families, we observe that the former share more drivers with liquidations than the latter. In addition, we observe that religious and environmental funds are more likely to suffer exit events than other SR fund types. Finally, other interesting findings point out that mergers financially benefit investors in merged SR mutual funds and the financial outcomes of acquiring fund investors are not jeopardized.     

Managers, investors, and crises: mutual fund strategies in emerging markets

We examine the trading strategies of mutual funds in emerging markets. We develop a method for disentangling the behavior of fund managers from that of underlying investors. For both managers and investors, we strongly reject the null hypothesis of no momentum trading: mutual funds systematically sell losers and buy winners. Selling current losers and buying current winners is stronger during crises, and equally strong for managers and investors. Selling past losers and buying past winners is stronger for managers. Managers and investors also practice contagion trading—they sell (buy) assets from one country when asset prices fall (rise) in another.     

A note on closet-indexing

Actively managed equity mutual funds with returns that are highly correlated with popular stock market indices like the S&P 500 often are accused of “closet-indexing”. We ask whether a trading strategy that shorts these funds and buys “true” index funds makes money for investors. Using a sample of high-R² growth-and-income funds from the CRSP survivor bias free mutual fund file, we document that the Sharpe ratio of this trading strategy and the market Sharpe ratio are statistically indistinguishable in the 1991–2000 sample period. The result is consistent with the view that widespread closet-indexing does not exist in the mutual fund industry.     

Spanish mutual fund fees and less sophisticated investors: examination and ethical implications

Some mutual funds not only apply the usual asset management and custodial fees, but also front loads and redemption fees as a kind of 'toll charge' payable on entering and/or leaving the fund. The aim of this work is to examine the implications of the different loads and fees applied to mutual fund investors in the Spanish market. The results show that there is a relationship between the various charges and fees. The fact that load fund companies charge higher management and custody fees proves the potential of the fund companies to impose higher fees on a segment of the clientele. The investors in load funds, which tend to be large in number of shareholders and belonging to banks and savings banks, are small investors who show a low cost sensitivity. A lower level of financial sophistication may be the reason for the apparent lower price awareness. The problem is that the investors in load funds are not financially compensated for the extra cost represented by the front-load and redemption fees. The only beneficiary seems to be the financial institution itself. On this view, the survival of load funds seems to depend on the lack of financial sophistication of their clientele, combined with market inefficiencies. It is worth asking about the ethics of a situation of market segmentation that allows managing institutions to benefit from the segment of the least sophisticated investors.     

The Performance of European Socially Responsible Funds

Recent years have witnessed an increasing growth in mutual funds that invest according to social criteria. As a consequence, the financial performance of these portfolios has attracted the interest of academics and practitioners. This paper investigates the performance of a sample of socially responsible mutual funds from seven European countries investing globally and/or in the European market. Using unconditional and conditional models, we assess the performance of these funds in comparison to conventional and socially responsible benchmark portfolios. The results show that European socially responsible funds present in general neutral performance in relation to both conventional and socially responsible benchmarks. However, performance estimates seem to be slightly higher when funds are evaluated in relation to socially responsible indices. Our results also show that socially responsible funds are more exposed to conventional than to socially responsible indices. Furthermore, conventional benchmarks are better able to explain fund returns than socially responsible benchmarks. These findings are robust to both unconditional and conditional models of performance. We also observe that conditional models lead to a slight improvement of performance estimates and to the explanatory power of the models, both when conventional and socially responsible benchmarks are considered. This is consistent with most previous empirical findings on conditional performance evaluation. Our results show that investors who wish to hold European funds can add social screens to their investment choices without compromising financial performance.     

机构投资者的交易行为研究:来自中国台湾股市的证据

文章以中国台湾股市为研究对象,主要研究机构投资者的交易行为。文章构建了机构投资者交易不平衡性指标——净交易,在此基础上研究机构投资者的交易行为。研究结果表明:台湾股票市场中以外资和投信基金为代表的金融机构投资者表现为正反馈的交易策略,并且交易的信息含量较高;一般法人的交易表现为负反馈的交易策略,并且交易的信息含量不足;而自营商由于交易动机复杂,交易的信息含量不明确。可见不同的机构投资者的交易行为并不相同。     

The Use and Abuse of Mutual Fund Expenses

Prior research shows that mutual fund investors are often aware of up-front charges like sales loads, but they are less mindful of annual operating expenses, even though both types of fees lower overall performance. This study documents the historical trend and recent abuse of annual mutual fund expenses. As the industry becomes more adept at segmenting customers by level of investment sophistication, we claim that load mutual fund companies take advantage of this ability and charge higher expenses to their target customer: the less-knowledgeable investor. No-load fund companies, which tend to attract the more sophisticated investor, offer lower expenses. For example, over 2000–2004 the average annual expense ratio of load equity funds was 50 basis points higher than no-load equity funds. We show evidence of this widening cost disparity since the early 1990s among new and existing equity, bond, and index funds. We also document a growing abuse of sales distribution or 12b-1 fees among funds that are closed to new investors, almost all of which are load funds. Thus, load fund investors are more susceptible to paying higher expenses and receiving lower returns over time. Todd Houge is an Assistant Professor of Finance at the University of Iowa. Jay Wellman is an Assistant Professor of Finance at Binghamton University.