Retail Investing in Passive Exchange Traded Funds
33 Pages Posted: 17 Feb 2020
Date Written: January 21, 2020
Using a large set of trading accounts, we study the determinants of retail investing in passive Exchange Traded Funds (P-ETFs). Controlling for investor characteristics related to their risk-return profile, trading activity, and socio-demographics, we show that the probability and magnitude of P-ETF investing by retail investors can be explained by financial knowledge, financial experience, and behavioral biases such as overconfidence and local bias. We also show that the more active P-ETF users hold a lower number of stocks and modify the composition of their stock portfolio less extensively, pointing to a substitution effect between stocks and P-ETFs.
Keywords: Behavioral biases, ETFs, Financial literacy, Passive investing, Retail investors
JEL Classification: G11, G40, G53
Suggested Citation: Suggested Citation