Equity prices tend to fall after ETFs rake in large sums of money. A study by TrimTabs Investment Research finds that monthly equity ETF flows and returns of the S&P500 one month later are negatively correlated to the tune of 21.4%.
The study concludes: “We have two explanations for the strongly negative correlation between equity ETF flows and future market returns. First, ETFs are traded mostly by retail investors and day traders. These are the least informed and most emotional market participants—the ones most likely to lose money over time. Second, we suspect hedge funds use ETFs when liquidity dries up. Hedge funds were forced to close individual stock positions during the credit crisis, so they bought equity ETFs instead. Equity ETFs posted large outflows in 2009, when liquidity improved”.