How the ability to trade ETFs at any time can lead to poor investment decisions

  • ETFs enable investors to indulge their worst instincts
  • Investors tend to poorly time when to get into and out of ETFs
  • ETFs facilitate the worst type of investor behavior
  • Open-end mutual funds have a structure that discourages frequent trading

ETFs were a great invention until they fell into the hands of retail investors and advisers. Recent research studies have shown that ETFs enable investors to indulge their worst instincts by allowing them to trade into and out of the market at any time. One study compared the performance of model portfolios of open-end mutual funds and ETFs managed by the same investment adviser, and found that the open-end fund portfolios outperformed the ETF portfolios in the majority of cases. Another study by Morningstar revealed that investors in ETFs tend to poorly time their investments, resulting in a significant gap between the performance of the ETFs themselves and the actual returns earned by investors. This behavior is attributed to the ability to trade ETFs at any time during the day. In contrast, open-end mutual funds have a structure that only allows trades to occur at the end of the day, which discourages frequent trading. While ETFs may have a superior structure on paper, they can facilitate the worst type of investor behavior.

Factuality Level: 3
Factuality Justification: The article contains some valid research studies and data, but it is heavily biased and presents a personal perspective as a universally accepted truth. The author’s opinion is presented as fact without considering other factors or perspectives. The article also includes some exaggerated and sensationalized reporting.
Noise Level: 3
Noise Justification: The article provides some interesting research studies on the performance of ETFs and the behavior of investors. However, it lacks scientific rigor and intellectual honesty as it only presents the author’s opinion and does not provide any evidence or data to support the claims made. The article also goes off-topic by discussing the structure of open-end mutual funds. Overall, the article contains some relevant information but is mostly filled with subjective opinions and lacks supporting evidence.
Financial Relevance: Yes
Financial Markets Impacted: The article discusses the performance of ETFs and the impact of trading behavior on investor returns. It may be of interest to investors in ETFs and those involved in the financial markets.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article does not mention any extreme events or their impact.
Key People: Mark Hulbert (regular contributor to MarketWatch), Kenneth Lamont (Morningstar senior research)

Reported publicly: www.marketwatch.com