For nearly 25 years, Exchange Traded Funds (ETFs) have been a popular passive investment vehicle for both household and professional investors due to their low transaction costs and high liquidity. But what are the pros and cons? How can you diversify your portfolio to avoid volatility? Today, we are joined by Professor Itzhak Ben-David, one of the world’s foremost academic experts on ETFs, the Neil Klatskin Chair in Finance and Real Estate at The Ohio State University (OSU) Fisher College of Business, and the Academic Director of the OSU Center for Real Estate. In this episode, we look at the current ETF market and the impact that ETFs have on underlying securities and investor outcomes. We discuss Morningstar ratings, the change that happened in 2002, and some mind-blowing data regarding hedge fund fees. We also dive into the correlation between miscalibrated CFOs and overconfidence; the unnecessary mental accounting people do when it comes to tax refunds, and so much more. This conversation makes for an incredibly diversified overview of a variety of topics that are relevant to financial decision-making at the household level. Finance experts will certainly find value here, too! Regardless of your level of experience, tune in today to learn more. Timestamps: 0:00:00 Intro 0:04:01 Itzhak describes the current state of the ETF market 0:07:05 How ETF issuers decide which products to launch 0:12:45 The theory that explains what we actually see in ETF markets 0:14:00 How Itzhak would describe the market for specialized ETFs 0:22:28 How ETFs are different from other institutional investors like mutual funds or hedge funds 0:24:08 How ETF ownership affects the volatility of the underlying securities 0:28:50 How we know ETF-induced volatility is not improving market prices 0:33:33 What we know about the behavior of mutual fund investors 0:37:37 Which interpretation of investor behavior makes more sense to Itzhak 0:41:38 How we can learn what investors care about from mutual fund flows 0:44:18 What mutual fund investors care about 0:48:42 Whether flows that chase ratings are really chasing past performance 0:54:28 The impact of the changes on fund flows 0:59:05 The impact the change had on the time-series and cross-sectional variation of style returns 1:06:15 How the behavior of hedge fund investors differs from the behavior of mutual fund investors 1:08:49 How hedge fund fees differ from typical mutual fund fees 1:16:01 What tends to happen after investors pull their money away from a hedge fund after a loss 1:20:24 The main lessons from this research for investors who may be interested in allocating to hedge funds 1:24:19 Why people treat their tax refunds differently from their other income and expenses 1:30:31 What people can do to avoid splurging with their tax refunds 1:37:20 How well-calibrated the return expectations of CFOs are 1:41:47 Whether or not CFOs become better calibrated as they produce more forecasts 1:44:56 Itzhak defines success in his life Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ Shop Merch — https://shop.rationalreminder.ca/ Join the Community — https://community.rationalreminder.ca/ Follow us on X — https://twitter.com/RationalRemind Follow us on Instagram — @rationalreminder Benjamin on X — https://twitter.com/benjaminwfelix Cameron on X — https://twitter.com/CameronPassmore Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/ Itzhak Ben-David — https://u.osu.edu/ben-david.1/ Itzhak Ben-David on LinkedIn — https://www.linkedin.com/in/ibendavi/ Financial Markets and Human Behavior - https://bpb-us-w2.wpmucdn.com/u.osu.edu/dist/d/7877/files/2023/08/202308_Rational_Reminder_podcast.pdf ‘Do ETFs Increase Volatility?’ – http://ssrn.com/abstract=1967599 ‘Mutual Fund Flows and Performance in Rational Markets’ – https://ssrn.com/abstract=383061 ‘The Performance of Hedge Fund Performance Fees’ – https://ssrn.com/abstract=3630723 ‘Paper on how people treat their tax refunds’ — ‘Managerial Miscalibration’ — http://ssrn.com/abstract=1640552 ‘The Persistence of Miscalibration’ — https://ssrn.com/abstract=3462107