http://www.trimtabs.com/global/pdfs/ETF_Flows_and_Market_Returns.pdf
correlation coefficients are statistically significant at the 1% level of confidence in all cases. Short equity ETF flows are positively correlated with future stock returns, and these correlation coefficients are also significant. Simply put, ETF investors are exceptionally poor market timers in both directions. We built a simple model that goes long the S&P 500 when equity ETF flows are below average, and short when they are above average. We tested it with moving averages of 1 to 100 days. The contrarian ETF portfolio significantly outperformed the S&P 500 in all cases, with average gains of 281 percentage points in the past decade. The outperformance was strongest for smoothing periods of one to four months. 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. When we removed long and short equity ETF flows from the TrimTabs Demand Index, the model portfolio’s
