Economic Policy Uncertainty and Global ETF Flows

Abstract

We investigate the association between fund exposure of economic policy uncertainty (EPU) and flows of exchange-traded funds (ETFs) using a unique sample of U.S. global ETFs from 2012 to 2017. We find that fund exposure of EPU is negatively associated with flows after controlling for returns, macroeconomic conditions, and other fund characteristics. Such a negative relationship is pronounced in funds with the high flow-performance sensitivity and economic relatedness. Investor sentiment is identified as the possible mechanisms through which fund exposure of EPU reduces ETF flows, as shown by the put-to-call option volume and short interest. Flow decomposition collaborates with the finding that only sentiment-driven flows respond to the EPU. Our study is the first to highlight the significant role of EPU in driving ETF flows in the global context.