The positive relationship between money flows into investment products and their return performance is an important market indicator for market practitioners and academics. This article studies the impact that active versus passive investment styles have on this relationship. We further evaluate the effects of a passive approach in two crucial stages: portfolio selection and asset allocation. We find that a passive investment style in either stage weakens the relationship between flows and returns compared with an active style. However, the investment style in the asset allocation stage has a greater effect than in the portfolio selection stage, on the relationship between flows and returns.

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.