Though many investors - laden with significant losses in their 401(k)s and flat returns on other products - have turned to ETFs to try to even out their earnings, new Vanguard research says ETFs have not necessarily launched a new generation of desparate day-traders.
According to a new study, Evaluating Dollar-Weighted Returns of ETFS versus Traditional Fund Returns, Vanguard says the critics of ETFs base their day-trader madness argument on share-turnover data that's measured at an institutional level, not the individual level.
Instead, the company examined some 3.2 million individual transactions from more than 500,000 positions held in traditional mutual fund and ETF share classes of four different Vanguard index funds from 2007 through 2011.
The result, Vanguard says, reveals a largely conservative approach on the part of investors, even in the ETF space.
“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,” said Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group.
“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.”
Vanguard admits a slightly higher level of trading activity in the ETF world versus mutual funds, but says that reflects the different characteristics of two very different investment products.
The study found that relative to investors in traditional mutual funds, investors who purchase an ETF are more likely to be male, to be over the age of 60, or to check their investment balances at least daily.
These three groups tend to trade more often, no matter what investment vehicle they're involved in.
The authors demonstrated that roughly 40 percent of the trading activity differences between ETFs and funds are explained by investor and account characteristics.
The study found that contrary to what critics claim, the ETF “temptation effect”—the supposed tendency of investors to trade more after they choose the investment vehicle, because of the availability of intraday trading—is not a likely source of observed high trading volume activity among ETFs.
Vanguard is the third largest U.S. ETF provider by assets under management and leads the industry in year-to-date cash flow of $28.8 billion into U.S.-based ETFs through the first half of the year. The firm manages 64 ETFs with a total of $209 billion in ETF assets.