Institutional Investor Preferences: Evidence from Exchange-Traded Notes

We use the introduction of exchange-traded notes (ETNs) as a way to examine which characteristics of institutional investors’ preferences are generalizable across new types of security design, as well as to infer which of the novel characteristics of ETN are in demand from institutions. As with equities, we find that institutions are drawn to ETNs with higher levels of capitalization, liquidity, and risk. Unlike in equity markets, we find no association between past returns, representing either momentum of contrarian patterns, and institutional preferences for ETNs. Instead, institutions engage in contrarian behavior by chasing underpriced ETNs. Lastly, we find changes in institutional holdings to be positively associated with future ETN returns. Overall, our results suggest that preferences of institutional investors are robust across security types, but that inferences made only with regard to equities can be incomplete.