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Vanguard Debunks Myth ETFs Turn Investors Into Speculators

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Do exchange-traded funds (ETFs) turn long-term investors into speculative day traders, as some critics claim? Not according to a new Vanguard research paper, “ETFs: For the better or bettor?,” which found that most Vanguard investors exhibit buy-and-hold behavior whether investing in a traditional index fund or ETF.

According to the company, which manages $209 billion of ETF assets and is the third largest ETF provider, “critics’ presumptions about ETF trading are typically based on macro-level share turnover data that is dominated by large institutional investors at the fund level—not built on data at the individual investor level.”

Using a unique data set of transactions conducted by individual investors, Vanguard researchers analyzed 3.2 million transactions in 500,000 positions held in traditional mutual fund and ETF share classes of four different Vanguard index funds from 2007 through 2011.

“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,” Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, said in a statement. “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.”

While Vanguard observed somewhat higher relative trading activity among ETF investments compared with their mutual fund counterparts, some of the difference is a reflection of different investors and characteristics associated with the two investments.

For example, the study found that relative to investors in traditional mutual funds, investors who purchase an ETF are more likely to be male, to be older than 60 or to check their investment balances at least daily. Analysis of trading behavior found that people in these three groups tend to trade more often, regardless of which investment vehicle they choose. The authors demonstrated that roughly 40% of the trading activity differences between ETFs and funds are explained by investor and account characteristics.

Vanguard concluded from the study 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.


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