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Tail-risk hedging, dividend chasing, and investment constraints: The use of exchange-traded notes by mutual funds

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  • Rakowski, David
  • Shirley, Sara E.
  • Stark, Jeffrey R.

Abstract

Our study examines mutual fund demand for a newly designed security, exchange-traded notes (ETNs). We find strong evidence that mutual fund long positions in ETNs significantly underperform and that the motivations to hold ETNs lie outside of maximizing returns. Mutual funds hold ETNs to hedge tail risk and to gain access to higher dividend yields. Mutual funds have a strong preference for derivative-like ETNs although this preference is unrelated to contractual constraints. Finally, we show that skilled timing of ETN investments is limited to the short-sales market.

Suggested Citation

  • Rakowski, David & Shirley, Sara E. & Stark, Jeffrey R., 2017. "Tail-risk hedging, dividend chasing, and investment constraints: The use of exchange-traded notes by mutual funds," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 91-107.
    • Handle: RePEc:eee:empfin:v:44:y:2017:i:c:p:91-107
    DOI: 10.1016/j.jempfin.2017.08.003
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    Cited by:

    1. Sherrill, D. Eli & Shirley, Sara E. & Stark, Jeffrey R., 2020. "ETF use among actively managed mutual fund portfolios," Journal of Financial Markets, Elsevier, vol. 51(C).
    2. John, Alexander & DeVault, Luke, 2023. "Implicit leverage: Can accrued fees cause levered ETN returns?," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Elvira Caloiero & Massimo Guidolin, 2017. "Volatility as an Alternative asset Class: Does It Improve Portfolio Performance?," BAFFI CAREFIN Working Papers 1763, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Rakowski, David & Shirley, Sara, 2020. "What drives the market for exchange-traded notes?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    5. Rakowski, David & Yamani, Ehab, 2021. "Endogeneity in the mutual fund flow–performance relationship: An instrumental variables solution," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 247-271.

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    More about this item

    Keywords

    Exchange traded notes (ETNs); Mutual funds; Tail-risk hedging; Dividend yield; Investment constraints; Short selling;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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