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This arti­cle is a guest con­tri­bu­tion by Matt Hougan, IndexUniverse.com, and was orig­i­nally pub­lished there on June 17, 2009.

A new analy­sis by Van­guard Group founder John Bogle indi­cates that investors are gen­er­ally mak­ing poor deci­sions when buy­ing and sell­ing exchange-traded funds.

Dur­ing a webi­nar hosted by the Jour­nal of Indexes and IndexUniverse.com on Wednes­day, the index­ing pio­neer unveiled the results of his recent look into invest­ment ten­den­cies by ETF investors. Bogle now pro­vides inde­pen­dent research and analy­sis through his Bogle Finan­cial Mar­kets Research Center.

Bogle com­pared the returns of 79 ETFs in a vari­ety of major asset cat­e­gories over the past five years to the returns of the aver­age dol­lar invested in those ETFs over the same time period. It’s a com­mon sta­tis­ti­cal prac­tice in mutual fund analy­sis, allow­ing investors to see whether they’re buy­ing at the bot­tom and sell­ing at the top, or vice versa.

While investor returns typ­i­cally trail fund returns by some mar­gin, Bogle expressed sur­prise at the degree to which investor returns suf­fered in ETFs.

“These num­bers … are unbe­liev­ably con­sis­tent,” said Bogle. “Out of 79 ETFs we cov­ered, 68 had investor returns that were … short of the returns earned by the funds themselves. “

And by no small mar­gin. The degree of investor-lag ranged from 0.4% per year for large-cap value funds to –17.9% per year for finan­cials ETFs. Investors seemed to do the worst in high-profile and volatile sec­tors like emerg­ing mar­kets, finan­cials and REITS.

On a sim­ple aver­age basis, ETFs in the study deliv­ered a 1% com­pound­ing return over the trail­ing five years, trans­lat­ing into a cumu­la­tive gain of 6%. Investors, how­ever, earned a –3.5% aver­age com­pound­ing return, trans­lat­ing into a cumu­la­tive loss of 12%.

“When you com­bine those, you’re talk­ing about 18% of investor cap­i­tal that’s been lost by all this trad­ing,” said Bogle.

To ham­mer his point home, Bogle com­pared the returns of investors in Van­guard ETFs with the returns of investors in com­pa­ra­ble Van­guard mutual funds. The study, look­ing over the same five years, con­firmed that investors trad­ing in and out of Van­guard ETFs did worse, on aver­age, than investors in Van­guard mutual funds.

“Investor lag in the ETF cat­e­gory is large and sig­nif­i­cant,” said Bogle. “The … mutual funds have a lag here and there, but in gen­eral, come very close to the mar­kets they are in.

“So we have evidence—strong evidence—that exchange-traded funds, because of the tim­ing that goes on in them, are not act­ing in the best inter­est of investors. Or, that investors are not act­ing in their own best inter­ests, which may be a bet­ter way to put it.”

Data for the study were com­piled by Morn­ingstar. The study looked at monthly cash flows and monthly fund returns. Bogle noted that this is not a pre­cise for­mat, as daily cash flows into and out of the funds could skew the results.

“Is that way of aggre­gat­ing data (on a monthly basis) pre­cise? No it is not,” said Bogle. “But I’m per­suaded in the absence of com­pelling data on the other side that these data are telling us some­thing that is worth know­ing … that mutual fund trad­ing is about as valu­able as trad­ing indi­vid­ual stocks, which is to say, not valu­able at all, and harm­ful to your returns.”

A com­plete replay and tran­script of the webi­nar will be avail­able on IndexUniverse.com on Thursday.

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