The Joys of Trading All Day Long

This evening I listened to a replay of a webinar presented by Vanguard founder and index industry guru John Bogle. The webinar was hosted by Journal of Indexes.

Mr. Bogle reminded the audience that the original tagline of the first ETF (State Street’s SPDR) was: “Trading the Market All Day Long in Real Time.” Sounds like fun, right? Trading in this fashion should be an endeavor saved for the soothsayers among us.

Mr. Bogle pointed out that the turnover of the SPDR ETF was 10,105% in 2009. Investors took the tagline to heart. That’s an amazing number and compared to 33% turnover in mutual funds in 2009. Mr. Bogle went on to point out (with his tongue firmly in his cheek) that the ETF model has been a great business model. It’s been a great business model for brokers and speculators. But how has the ETF model been for individual investors?

According to Mr. Bogle’s studies, over the past five years the SPDR has performed -1.9% per year (a result of the market, not of the ETF model). But the average investor in the SPDR lost 8.2% per year. He goes on to say, “So you tell me if all that trading was good for the investors or not good for the investors.”

My point for blogging about the study is not to disparage ETFs. Well, maybe a little bit of criticism, I admit. My point is, and I made a similar point in a recent article, that if individual investors are buying ETFs rather than index mutual funds for the fact that ETFs can be traded throughout the day, then they should think again -- or buy an ETF for another reason.