Does Trading by ETF and Mutual Fund Investors Hurt Performance? Evidence from Time- and Dollar-Weighted Returns

This paper analyzes the “return gap” between dollar-weighted returns that account for intermediate investor flows (internal rate of return) and buy-and-hold returns that funds typically 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. The high turnover of liquid ETFs does not lead to sub-par returns for investors in these funds