Investor behavior in ETF markets: a comparative study between the US and emerging markets

Abstract

Purpose The purpose of this paper is to present the results of a study on investor behavior in exchange-traded fund (ETF) markets. The standard feedback trading model of Sentana and Wadhwani (1992) is used in a sample of 18 ETFs contracts in Brazil, China, South Africa, Korea, Mexico and India, as well as three ETFs contracts in the US market. Design/methodology/approach The sample includes data on daily closing prices and net asset values (NAVs) for three ETFs from each of the emerging markets of Brazil, China, Mexico, Korea and India, as well as on three ETFs from the US market. The authors used the earliest start date available in the Thomson Reuters database pertaining to all of the ETFs, and all series ended on May 5, 2017, and applied the well-established Santana and Wadhwani (1992) seminal model to evaluate evidence of feedback trading in the sample. Findings The empirical analysis suggests that there is evidence of feedback trading in emerging markets such as Brazil, Korea, Mexico and India, while there is no such evidence for the US market. The results are consistent with the view that developed markets investors are prone to pursue fundamental-driven investment strategies, while emerging markets investors appear to have informational guided behavior. Research limitations/implications Emerging markets still make up a very small part of the global ETF market, led by the USA. Nevertheless, it is extremely important that studies of this nature be gradually expanded as these markets grow, in order to verify how emerging markets compare to their developed counterparts in terms of the efficiency of information sharing and rationalization of its operations. Practical implications Emerging markets policy makers could benefit from these findings by stimulating new mechanisms that could minimize informational asymmetry and the persistence of so-called noise traders, a phenomenon observed recently in studies regarding ETF markets (Brown, Davies and Ringgenberg, 2018). Originality/value The behavior of investors was investigated by analyzing a sample of 18 ETFs from the emerging markets of Brazil, China, South Africa, Korea, India and Mexico, as well as three ETFs from the US market. Despite of being investigated separately both emerging (Charteris et al., 2014) and developed markets (Chau et al., 2011), the innovation consists in comparing those markets in a single study, pursuing to explain potential reasons for the differences observed between developed and emerging markets.

Does financial literacy affect investor's planned behavior as a moderator?

“…This might be because accessible information to an individual is incomplete and does not consider factors like security and secrecy, potential investors usually have to depend on their trusted individuals and referent groups (Gopi and Ramayah, 2007) as a reliable source of information. It also supports the opinion that developing markets investors seem to follow the information provided by their peer group (Da Costa et al, 2019). The results of the study enlighten the significant association of PBC with investment intention, which displays that Indian investor have significant but not complete rheostat on their decision for stock investing.…”

Past behaviour, financial literacy and investment decision-making process of individual investors

“…SN was also a decisive factor in building investors’ intention which supports the importance of perceived social influences or pressures (Ivkovic and Weisbenner, 2007; Shanmugham and Ramya, 2012) and signifies how much the peers' opinion is important. It also supports the view that investors of emerging markets appear to have informational guided behaviour (Da Costa et al , 2019) Moreover, the significant relationship of PBC shows that Indian investors have no complete control over their decision for stock investing, this may be due to the lack of efficient investment platform and awareness among investors, such as proper information about the stock market investment. It can, therefore, be said that Indian investors are mainly driven by the influence of their friends, family members or colleagues to participate in the stock market.…”

Do Market Conditions Affect the Tracking Efficiency of Exchange-traded Funds? Evidence from Developed and Emerging Markets

“…Exchange-traded funds (ETFs, hereafter) are essentially index funds that are listed and traded on exchanges like stocks, which was not possible until their development in the late 1980s in Canada, gaining popularity since the inception of SPDR S&P 500 ETF Trust (SPY) in the USA in 1993. It surpassed the hedge fund industry in size by 2016 (da Costa Neto et al, 2019). Globally, ETFs have opened a whole new panorama of investment opportunities to retail as well as institutional investors and managers.…”

“…In an attempt to address these issues, we have updated the sample used in da Costa Neto et al (2019), including data on daily closing prices for three ETFs from each of the emerging markets of Brazil, China, South Africa, Mexico, Korea and India, as well as on three ETFs from the US market, with their correspondent underlying indexes. According to the authors, those were the highest transaction volume ETFs for each market available in the Thomson Reuters database, aiming to be a representative sample of those markets.…”