The exchange traded product business has allowed investors to access broad swaths and small corners of the market to enhance their investment objectives. The title “exchange traded fund investor” is still a vague, subjective term that has grabbed more attention as the industry matures.
“We conclude that it is not valid to assume that the so-called ETF temptation effect explains the higher-observed trading in ETFs relative to mutual funds, nor is it reason for long-term individual investors to avoid using appropriate ETF investments as part of a diversified investment portfolio,” Vanguard Research said in a recent note regarding the recent claim that holding ETFs tempts investors to trade frequently.
According to Vanguard, an ETF may be chosen by an investor that intends to trade rather than claiming that ETF holdings are a direct cause for increased trading activity. Ari Weinberg for Forbes reports that Vanguard’s unique fund structure, in which ETFs are a share class of a mutual fund, and the position as a record-keeper of brokerage trades gives the company the basis for the research. [Alternative ETFs May Find Home in Separate Accounts]
The company concluded that a typical ETF investment is about 15% less likely to be a buy-and-hold investment than a traditional mutual fund. [ETFs and Financial Advisors]
At provider Charles Schwab, where assets account for about 10% of the U.S. ETF market, 10% of traders are retail focused, making an average of 36 trades per year; 40% are retail investors and 50% are RIA clients, reports Weinberg.
Various companies are making their own “ETF investor” analysis, such as ITG and Greenwich Associates. The areas of investing that were left out of the results are the leveraged investors and those that participate in commodity pools. [Vanguard Founder Bogle Tempers Criticism of ETFs]
At the end of a day, the term “ETF investor” ends up being a simple label that carries little weight. Investors who use ETFs are just that and are simply behaving the way they would no matter what vehicle they choose.
Tisha Guerrero contributed to this article.