The exchange traded fund industry has been unfairly blamed for various mishaps and trends in the market such as high frequency trading to the Flash Crash of 2010. The latest data is proving that they are also just good long term investing tools.
“There’s no doubt ETFs are popular with hedge funds and day traders,” Rob DeHollander says. “But they’re also finding broader acceptance among institutional investors and wealth managers with longer-term investment strategies.” [Index ETFs Outperform Most Managers]
A recent Deutsche Bank study found that advisers with discretionary control over client portfolios and more than $100 million in assets in 2011 overwhelmingly accounted for the biggest chuck of ETF assets held by institutional-level investors, reports Murray Coleman for The WSJ. Since 2010 portfolio managers have upped their exposure to markets with ETFs, and the number of long term investors using these funds is growing.
Retail investors, who are typically long term oriented, dominated about half of the ETF market at the end of 2011. [Who are ETF Investors?]
Furthermore, the idea that ETF investors are making unnecessary trades has also been undermined. Some in the industry believe that investors are trading ETFs simply because they can and not for any other reason.
A study at Vanguard Group found that 83% of all transactions tied to mutual funds tracked during the five-year period were long term in nature. Meanwhile, 62% of the firm’s deals in leading ETFs were categorized as stemming from strategic-allocation decisions. [Slow and Steady: Investors Favoring Dividend, Low-Volatility ETFs]
“Our evidence suggests that we’re not seeing ETFs cause people to trade more frequently. Rather, what we’re finding is that people who trade more are choosing ETFs more frequently these days,” Joel Dickson, Vanguard’s senior ETF investment strategist said.
The flexibility of an ETF to develop a long term asset allocation plan and to assist investors in making diversified, low-cost investment choices has been recognized by many long term investors.
Tisha Guerrero contributed to this article.