A recent study from Vanguard addresses the stereotype that investors with exchange-traded funds (ETFs) are active traders and aggressive market timers.1 To the contrary, according to Vanguard, ETF investors are likely to exhibit long-term, buy-and-hold behavior, and their distinctions from mutual fund investors may be explained by personal and account characteristics.
Critics of ETFs have pointed to the availability of intraday trading and trading on margin as characteristics that could tempt ETF investors to trade more often than their counterparts with mutual funds.2 This trading, in turn, could potentially reduce an investor’s long-term return, and on a macro level, destabilize the financial markets. Although large ETFs such as State Street’s SPDR S&P 500 experience share turnover of more than 30% per day, Vanguard believes that large institutional investors are responsible for most of this activity.
A Look at Retail Investors
An examination of retail investments presents a different story. Among Vanguard’s retail universe, 83% of mutual funds and 62% of ETFs were held in accounts that exhibited buy-and-hold behavior. Less than 1% of ETF positions averaged more than one investment reversal per month.
It is possible that investors who trade more often select ETFs as their preferred vehicle. In the Vanguard study, the ETF account holders were more likely to be men who checked their account balances at least once per day. This group is more likely than others to trade more frequently. ETFs do not necessarily cause these account holders to trade. Instead, they have a greater propensity to trade at the outset, and ETFs are their preferred vehicle. Many mutual funds impose policies that limit short-term trading, and also assess purchase or redemption fees. ETFs typically do not impose these restrictions, although brokerage commissions on trades impact investor returns.
1ETF prices change throughout the trading day, and investors may not be able to realize a quoted price. Purchase and sale of ETF shares may involve brokerage trading commissions that are not typically included in the ETF expense calculations. The frequent trading of ETFs could significantly increase costs such that they may offset any savings from low fees or costs. An investment in an ETF involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. Additional risks of ETFs include lack of diversification, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
2You can lose more funds than you deposit in a margin account. The firm can force the sale of securities or other assets in your account. The firm can sell your securities or other assets without contacting you. You are not entitled to choose which securities or other assets in your accounts are liquidated or sold to meet a margin call. The firm can increase its house maintenance margin requirements at any time and is not required to provide you with a written notice. You are not entitled to an extension of time on a margin call.
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