Are the Flows of Exchange-Traded Funds Informative?

This paper provides novel evidence of information asymmetry in Exchange-Traded Fund (ETF) markets, focusing on the informativeness of ETF flows. By decomposing daily ETF flows into three components, we find that certain ETF shares are created or redeemed in anticipation of forthcoming news, whereas ETF flows driven by market making and arbitraging are not closely related to forthcoming news. Moreover, the information-driven ETF flows wield substantial power in predicting the ETF returns of the next day. Informed traders are able to exploit their information advantage for profits, realizing an annualized open-to-close return of 19.3% or close-to-close return of 22.9%