Proving that retail investor emotionality is consistent regardless of the investment vehicle, it turns out that ETF investors are no better at timing than mutual fund investors.
In an Index Universe article entitled ETF Investors Are Horrible Market Timers, Olivier Ludwig reports:
“Just do the opposite of what ETF investors do and you’ll do OK,” Vincent Deluard, the author of the study, said in a telephone interview. “The ETF is an inexpensive and relatively efficient way to invest passively. But the problem comes from ETF investors who try to time the market.”
The study found that literally doing the opposite of what retail investors were doing (based on the fund flows) was quite profitable, as opposed to what ETF investors actually did.
The author of the study at TrimTabs had some advice for investors:
“When you don’t know anything about the market, you should buy and hold. But because ETFs are so liquid, they give a false sense of power, especially if you look at the leveraged stuff,” Deluard said. “It’s spectacular how much money people lose in those things.”
Contrast the emotional trading of retail investors with a systematic strategy of asset class rotation. There’s no comparison. According to studies, systematic asset class rotation can lead to outperformance over time, while individual investors just tend to shoot themselves in the foot.
