One of the great things about ETFs is that short-term traders and long-term investors can peacefully coexist, unlike mutual funds.
“ETFs democratize investing-retail investors come together with the biggest and smartest institutions in one product and are treated fairly and the same,” Joseph Linhares of BlackRock iShares said in a recent report. [Record Number of ETF Closure This Year]
ETFs have been able to track their benchmark closely. However, it’s important for investors to educate themselves on ETFs and how they work, reports John Gapper for the Financial Times. [Investors Using ETFs for Long Term Strategic Allocations]
The ETFs appeal to the retail investor, as they give them access to special niches in the market, access to several stocks at a decent price and trade with the ease of one transaction. Further, institutional investors like them because of their tradability, and use of shorting or hedging the market. [ETFs Supplement Long Term Investing Strategies]
The latest theory is the “temptation effect” that was recently rebutted by Vanguard in a report. The idea that ETFs were causing investors to trade more times throughout a day was attributed to the fact that since they trade so easily, investors will do so simply because they can. However,Vanguard concluded that retail investors were not driving this activity. The day traders were contributing to the action,but would have done so regardless of the tool they used.
In this two-sided market, retail investors are the buy-and-hold investors and traders and market makers are getting their jobs done. After all, ETFs are a favorite tool of institutions that short the market, since it is easier to trade a basket of share rather than 50 different stocks.
The benefits of ETF investing must be taught and investors need to be further educated by financial advisors so that the risks are known.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.