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%.
