Do Stock Retail Investors Show Better Portfolio Performance When They Hold Passive ETFs?

Abstract

We investigate the portfolio performance of retail investors who combine stocks and passive exchange traded funds (P-ETFs) by relying on both proprietary trading records and survey data. We use propensity score matching to control for all the key investor characteristics and better identify the contribution of holding P-ETFs in retail portfolios. We find that heavy P-ETFs investors trade more passively, while light P-ETF investors trade as actively as investors who hold individual stocks only. The level of total and systematic risks are lower in portfolios held by P-ETF investors. The risk-adjusted performance remains negative for all retail investors, irrespective of their exposure to P-ETFs. Nevertheless, retail investors who hold P-ETFs generate higher risk-adjusted returns than those who trade individual stocks only.

Keywords: ETFs, Retail Investors, Portfolio Performance, Passive Investing, Core-Satellite

JEL Classification: G11, G40, G53