According to a recent research report from TrimTabs, ETF investors are so bad at picking the right time to buy or short-sell the equity markets that those doing exactly the opposite of what ETF players did in the past 10 years would have ended up making sevenfold profits, while the S&P 500 Index lost almost 18 percent.
TrimTabs offered two explanations for its conclusion. First, ETFs are mostly traded by retail investors and day traders, which they consider the least-informed and most emotional market participants. It also said hedge funds use ETFs when liquidity dries up, and many gravitated to ETFs after they were forced to close individual stock positions as markets went into a tailspin following the collapse of Lehman Brothers in the fall of 2008.
Equity ETFs had record inflows of $111 billion between September 2008 and December 2008. That was followed by losses of $29.7 billion between January 2009 and April 2009, when markets returned to normal and hedge funds could resume their regular individual stock picks, the TrimTabs study said.
It said the fact that it confirmed the contrarian hypothesis for one-, two- and three-month periods for long- and short-equity ETFs strongly suggests the negative correlation is not the result of luck. The study’s author believes that the liquidity of ETFs gives inexperienced investors a false sense of power.
TrimTabs said it’s not unusual to observe a strong correlation between flows and returns on a simultaneous basis because flows often chase returns. But the research firm said this was the first time it observed such a strong correlation on a forward basis, meaning investors could do very well by using past flow data as a contrary leading indicator. |
