Yuet Chau

This paper shows that policies intended to improve a market’s efficiency can create frictions that spill back into the same market through shared arbitrageurs. I exploit a novel settlement mismatch created by the 2024 US transition to T+1: US-listed global ETF shares began settling on T+1 while many of their foreign holdings continued to settle on T+2. Relative to non-US ETFs tracking the same indices, these ETFs’ primary-market activity becomes less responsive to mispricing, especially in creations. Although US domestic ETFs face no mismatch, their responsiveness declines more when they rely heavily on authorized participants active in affected global ETFs.

We investigate whether packaging active management into an exchange-traded, shortable vehicle improves managerial discipline and capital allocation. We show that actively managed ETFs (AETFs) exhibit substantially higher flow-performance sensitivity (FPS) than nearly identical mutual funds, with this heightened sensitivity concentrated on negative risk-adjusted performance. This downside discipline is driven by short-selling: AETFs with higher short positions experience significantly steeper FPS, as short-sellers trigger outflows via the ETF redemption channel. This external monitoring imposes real career consequences: short positions spike upon the appointment of poor-performing managers and predict managerial exit. Finally, we show that short-selling discipline shapes the composition of managers across fund structures, as the best performers manage AETFs while the worst manage only mutual funds. Our results suggest that removing short-sale constraints on delegated capital strengthens the disciplinary forces that align capital with managerial ability.

We find that active corporate bond ETFs earn lower net-of-fee alpha than comparable mutual funds, particularly among high-yield funds and even when comparing same-manager funds. We trace this performance gap to a friction inherent in the ETF structure: misaligned incentives between active managers and authorized participants (APs). Bonds received in kind from APs reflect dealer inventory pressures and subsequently earn lower long-horizon returns than bonds purchased directly by the same ETFs. Knowing this, active ETFs—unlike passive ETFs—rely predominantly on cash to settle creation and redemption, and trade directly in the bond market, much like mutual funds. We investigate the determinants of cash settlement and build a model that rationalizes the performance gap despite managers’ flexibility to use cash. Overall, these results suggest that the ETF structure introduces frictions to active bond funds, to which managers respond by using cash settlement as a partial remedy.

We study the extent to which actively managed mutual funds bet on the CEO. We uncover large heterogeneity in trading activity around CEO turnover: Some funds consistently “bet on the CEO,” while others do not. Funds that bet on the CEO place stronger bets on CEOs with high ability and on firms in industries where managerial skills are more important. These funds follow CEOs when they are hired by other firms, and increase (decrease) the portfolio weight of the raiding (raided) firm. Overall, our results show that some mutual funds trade stocks based on their assessment of CEO talent.