The latest theory is the “temptation effect” that was recently rebutted by Vanguard in a report. The idea that ETFs were causing investors to trade more times throughout a day was attributed to the fact that since they trade so easily, investors will do so simply because they can. However,Vanguard concluded that retail investors were not driving this activity. The day traders were contributing to the action,but would have done so regardless of the tool they used.
In this two-sided market, retail investors are the buy-and-hold investors and traders and market makers are getting their jobs done. After all, ETFs are a favorite tool of institutions that short the market, since it is easier to trade a basket of share rather than 50 different stocks.
The benefits of ETF investing must be taught and investors need to be further educated by financial advisors so that the risks are known.
Tisha Guerrero contributed to this article.
