They have made investing easier, but one expert argues they aren’t creating hyperactive investors
With the rise of digital investing platforms and improving mobile technology, it’s easy to imagine investors being swept into becoming hyperactive traders. After all, the more often people can see their portfolio’s performance, the greater the temptation to react by buying and selling holdings — especially when it comes to ETFs.
But after diving into some statistics, one expert says that the argument against ETFs doesn’t hold water. “In truth, ETFs have become an important tool in both portfolio construction and management,” wrote ETFguide founder and Chief Portfolio Strategist Ron Delegge in a piece for Financial Advisor Magazine.
Citing the latest ETF Managed Portfolios Report from Morningstar, Delegge said that professionally managed ETF portfolios saw steady asset levels near US$121.9 billion during the first quarter of 2018. Among the 20 strategies with the largest quarter-over-quarter increases in assets, 12 were plain-vanilla stock/bond strategic asset-allocation portfolios.
“Asset flow trends are signaling an increasing preference by investors for managed solutions, with ETFs being used as the primary building blocks,” he argued, adding that ETF use has helped people and advisors build more diversified, tax-friendly, and cost-efficient portfolios.
In a May interview with Barron’s, Vanguard founder John Bogle compared the 785% turnover rate for the 100 largest ETFs with the 144% observed for the largest 100 stocks in the US. To that point, Delegge said the bulk of ETF trading has mostly been done by large institutions, not retail investors, ever since the US saw its first ETF launch in 1993.
“Vanguard conducted its own examination of ETF trading activity in 2012, and the findings contradict Bogle’s entrenched arguments that ETF shareholders are short-term speculators,” Delegge continued. The study titled ETFs: For the Better or Bettor? Examined more than 3.2 million transactions in more than 500,000 positions held in mutual-fund and ETF share classes of four Vanguard funds from 2007 through 2011.
According to Delegge, the analysis revealed that 99% of traditional mutual-fund investments and 95% of ETF investments saw no more than four reversals in investment direction per year. Focusing on ETF positions, less than 1% averaged more than one investment reversal per month.
“Furthermore, the study revealed another promising trend: The majority of traditional mutual fund and ETF investments in Vanguard’s study were categorized as buy-and-hold investments (83 percent and 62 percent, respectively),” he said.
