Study Concludes Investors’ Use of ETFs Results in Underperformance

Commentary on InvestmentNews article by John Waggoner

A study of the use of passive exchange-traded funds by German users concludes that subpar selection and poor market timing make them a bad bet, Investment News writes. 

High Expense Ratios, Bad Timing, Plus Trading Costs

The “ETF Abuse” study analyzed data from a large brokerage firm in Germany and found a lack of passive ETF performance in investor portfolios, according to the publication.

The study found that ETF users, who were largely younger and more affluent than those who didn’t use ETFs, lost 1.16 portfolio percentage points each year by adding ETFs to their portfolios, InvestmentNews writes. Aside from trading costs, poor timing accounted for 0.77 percentage points of the difference, according to the publication.

Meanwhile, ETF investors fell behind by 1.69% annually when compared to buy-and-hold portfolios, according to the study. On average, the return rate was lower because investors had chosen ETFs with a higher price tag rather than opting for the lower-cost ones, but the overall losses have more to do with poor timing, according to the study's authors, InvestmentNews writes.

Morningstar came to a similar conclusion about market timing when they compared actual mutual fund returns to those achieved by investors in those funds, the publication writes.

In the U.S., the expense ratios of the ten largest and most popular ETFs are anywhere from 0.05% to 0.15%, so what is happening in Germany might not be the case for American investors, Todd Rosenbluth, director of ETF and mutual fund research at CFRA, tells InvestmentNews.

However, the top 10 ETFs with the highest trading volume in the past three months have an average expense ratio of 0.69%, according to the publication.

The new study’s authors aren’t claiming that a well-diversified, low-cost portfolio including ETFs doesn’t bring results, according to InvestmentNews.

But the study ultimately concludes that the best strategy is selecting a broad-based, low-cost ETF and holding onto it, despite the inevitable temptation to trade it, the publication writes.

Source: InvestmentNews

Posted by: The Trust Advisor


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