Our Insights

About personal finance, investments and markets.
January 12, 2015

Is the use of ETF improving portfolio performance?

ETF (passive index funds) are widely considered to be the ideal core investments due to their low costs, easy diversification, transparency and intra-day liquidity. But are ETF really benefiting individual investors? Data from one of the largest brokerages in Germany show that ETF actually did not improve the portfolio performance. On average, investors who use ETF had returns of -2.1% p.a. less than investors who do not use ETF.

ETFs are not the holy grail. Behavior is more important than products. The study shows that the lower performance is the result of investors trying to time the market. Ironically, the low cost and high liquidity of ETF seem to encourage trading and aggravate the individual temptation to engage in this behavior.

This study confirms what other data have shown previously. The US focused Dalbar study calculated that, over the previous 20 years, investors who succumbed to the cycle of greed and fear earned returns that were about 4%-5% lower then they would have been had they resisted those temptations.

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A well laid-out financial plan is therefore key for investors. Advisors can help to take out the emotional aspects of overtrading that so many private investors are prone to.

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