Do exchange traded funds turn long-term investors into speculative day traders, as some critics claim?
Not if they’re Vanguard investors.
According to a new Vanguard research paper, ETFs: For the better or bettor?, most Vanguard shareholders exhibit disciplined “buy and hold” behavior whether they’re investing in traditional index funds or ETFs. Why is that good news? Because if it were true that ETFs cause investors to trade more, then ETF ownership could result in increased transaction costs and ill-advised market-timing behavior—both of which might reduce an investor’s returns.
Vanguard’s research found that critics’ presumptions about ETF trading are typically based on data dominated by large institutional investors at the fund level—not on data at the individual investor level.
Using a unique data set of transactions conducted by individual Vanguard clients, our researchers analyzed more than 3.2 million transactions in more than 500,000 positions held in traditional mutual fund and ETF share classes of four different Vanguard index funds from 2007 through 2011.
“Our individual investor data show that the majority of both traditional mutual fund and ETF investments are held in a prudent, buy-and-hold manner,” said Joel Dickson, one of the study’s authors and a principal in the Vanguard Investment Strategy Group.
“While differences exist between the characteristics of people who buy each investment type, our analysis shows that claims of speculative trading behavior among ETF investors are greatly exaggerated,” he said.
The majority of Vanguard ETF and mutual fund investments exhibit buy-and-hold behavior