Exchange-traded funds (ETFs) collect approximately 7% of all U.S. corporate dividends, which they are required to redistribute to investors. How do the funds manage these dividend flows, and does such management have spillover effects on other financial markets? In this paper, we document a new stylized fact of the “ETF dividend cycle:” ETFs gradually invest in money market funds (MMFs) when they accumulate dividend receipts and periodically withdraw from MMFs when they distribute dividends. This cycle creates periodic liquidity shocks to MMFs and, consequently, to the Treasury markets as the affected MMFs liquidate some of their short-term Treasury holdings to satisfy ETFs’ dividend-driven withdrawals. As a result, ETF dividend cycles can explain flows to MMFs and fluctuations in Treasury yields.
ETF Dividend Cycles Predict Money Market Fund Flows and Treasury Yield Changes
We thank Ivo Welch (editor) and an anonymous reviewer for their insightful suggestions. We also thank Wenxi Jiang, Xin Liu, and seminar and conference participants at the University of Georgia and the Lapland Investment Fund Summit for their constructive comments. We are grateful to Weijun Ou and Xuling Zhu for their valuable practical views. Yapei Zhang acknowledges support from the National Natural Science Foundation of China (Grant No.: 72403164). Tong Zhou acknowledges support from the National Natural Science Foundation of China (Grant No.: 72003206). All remaining errors are our own.
Honkanen P, Zhang Y, Zhou T (2025), "ETF Dividend Cycles Predict Money Market Fund Flows and Treasury Yield Changes". Critical Finance Review, Vol. 14 No. 3 pp. 425–445, doi: https://doi.org/10.1561/104.00000164
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