ETFs primarily used for buy and hold, finds Vanguard

Apr 17th, 2019 | By | Category: ETF and Index News

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Despite the perception that ETFs are used for short-term trading, research from Vanguard has found that the majority of investors primarily use the vehicle as a long-term investment tool.

ETFs primarily used as buy-and-hold vehicles, finds Vanguard

The primary reason for buying ETFs is for buy-and-hold purposes, cited by 47% of professional investors.

The low-cost ETF provider commissioned a survey of 400 professional ETF buyers across Europe, via the independent research group Presicent, and found that nearly half (47%) primarily use ETFs for core buy-and-hold investing.

In contrast, tactical use came a distant second with less than a quarter (24%) selecting this option.

Interestingly, the research uncovered diverse ETF priorities across regions, with buy-and-hold strategies used significantly more among investors in the UK (85%) and Germany (65%), while the majority of Italian investors (71%) are still using ETFs to make shorter-term tactical adjustments.

The third most popular primary use of ETFs is portfolio completion, using ETFs to plug portfolio gaps and match a benchmark’s asset allocation, selected by 16% of buyers. Some of the lesser-cited primary strategies include liquidity management (4%), rebalancing (3%), risk management (3%), and cash equitization (1%).

Vanguard believes the sheer breadth of reasons cited is evidence of the maturity of the ETF market, as well as its potential for future growth.

How much do costs matter?

While the cost of ETFs is commonly cited as a key driver in the industry’s AUM growth, the results show that when it comes to ETF selection, no single criteria is dominant.

Expense ratio is cited as the top priority by 18% of respondents; however, liquidity of underlying holdings (17%) and tracking error (15%) also emerge as significant factors.

According to Vanguard, the emphasis placed on the liquidity of underlying holdings highlights the important role ETFs play in allowing investors to enter and exit markets smoothly and at scale.

At the country level, German buyers emerge as the most cost-conscious (38% of respondents cited expense ratio as their top factor), whereas Italian and Swiss buyers are more benchmark-sensitive, selected by 27% and 21% of respondents, respectively. Among UK buyers, liquidity of the underlying’s (20%) and spread considerations (21%) were chosen as top priorities.

Do investors favour local exposures?

The survey also sought to uncover whether buyers favour a local, regional, or global approach when selecting ETFs, with the results showing a strong demand for all three.

Use of global ETFs is strongest in Italy (80% of respondents reported using global ETFs) and Germany (59%), higher than these countries’ use of regional ETFs (59% and 45%, respectively). In Switzerland and the UK, even though single country exposures are more popular, a significant proportion still adopt a global approach with ETFs (41% and 51% respectively).

Vanguard notes the results show that investors are keen to cast their net far and wide in the search for diversification.

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