The latest argument that exchange traded funds are transforming buy-and-hold investors into day traders has been dismissed. A recent study by Vanguard finds that long term investment trends are evident no matter which tool an investor uses.
“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,” Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, said in a statement. “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.” [Are ETF Investors Better at Timing the Markets?]
Critical presumptions that ETFs create more speculative trading behavior in investors has been based on macro-level share turnover data that is dominated by large institutional investors at the fund level. Data regarding individual investors was not included, reports John Sullivan for AdvisorOne. [Why Vanguard Founder Bogle Doesn’t Like ETFs]
As the third largest ETF provider, Vanguard has witnessed high trading activity behavior associated with ETFs, in comparison to mutual funds. This difference can be attributed to the nature of the funds and basic traits that are built into them.
Day trading is an advantage of ETFs because they are priced in real time, and are accessible any time of the trading day. Mutual funds close at the end of the day, and this is the only opportunity to buy or sell. It is not until then that pricing and holdings are disclosed.
Critics claim the “temptation effect” is due to the flexibility of an ETF, and that since the fund is readily available to trade, investors will do so. The theory implies investors that wouldn’t normally do so are compelled to trade, since the option exists.
The study found that relative to investors in traditional mutual funds, investors who purchase an ETF are more likely to be male, to be older than 60 or to check their investment balances at least daily. Furthermore, people in this group tend to trade more, regardless of which vehicle they pick.[Vanguard ETF Has Biggest Target Stake Among Dividend Funds]
In close, just because an ETF can trade throughout the day does not mean that investors are going to do so, just because. Typically, if an investor is trading their funds, whether mutual fund or ETF, they would do so no matter what tool they are investing in.
Tisha Guerrero contributed to this article.