“We know equity investors, especially with retail investors, have the tendency to chase returns,” she says.
That herd behavior tends to swell the valuation of the underlying assets in the ETFs, but eventually that valuation will revert back to normal and the asset will eventually underperform.
That pattern in the equity ETFs, however, is missing from fixed-income ETFs, Zhu notes. The inflows and performance across the quintiles in the fixed-income funds has been flat since 2009.
“Fixed-income investors are more risk averse. They want to protect their principal or protect their investment. So instead of return-chasing, when things are not going well they may overreact [and sell],” Zhu says.
There aren’t enough ETFs investing in commodities and currencies, Zhu says, to make a meaningful analysis. She says she’ll need to look closer to ascertain why equity ETFs with high inflows relative to AUM underperformed, but for now she says it’s another reminder to be thoughtful when investing.
“It’s just something that you want to keep in mind when you are trying to build your portfolio, to probably avoid certain ETFs which are really hot,” she says.