It depends on the investor — and the investment
The study acknowledged that ETF trading behavior is more active than behavior in traditional mutual funds. However, the study showed that much of that difference is because investors who are inclined to trade choose ETFs, not because investors who choose ETFs are encouraged to trade.
For example, the study found that relative to investors in traditional mutual funds, investors who purchase ETFs are more likely to be male, to be over the age of 60, or to check their investment balances at least daily. Not surprisingly, our analysis of trading behavior found that people in these three groups tend to trade more often, regardless of which investment vehicle they choose.
Mr. Dickson and his three co-authors—John Ameriks, Stephen Weber, and David Kwon—demonstrated that about 40% of the trading activity differences between ETFs and funds are explained by such investor and account characteristics.
The study also found that contrary to what critics in the popular media claim, the ETF “temptation effect”—the supposed tendency of investors to trade more after they choose ETFs as an investment vehicle because of the availability of intraday trading—isn’t a likely source of observed high trading volume activity among ETFs.
“The ‘temptation effect’ is not a significant reason for long-term individual investors to avoid using appropriate ETF investments as part of a diversified investment portfolio,” the authors concluded.
Notes:
- All investing is subject to risk.
- Diversification does not ensure a profit or protect against a loss in a declining market.
- You must buy and sell Vanguard ETF Shares through a broker, which may incur commissions. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in Creation Unit aggregations. Like stocks, ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.