Why Don’t Investors Trade ETF

周行一 Edward H. ChowProfessor of Finance, NCCU

Dean of College of Commerce2006/7

No. of Investors trading different categories of stocks post ETF

單位：人次

Percentage of Investors trading different categories of stocks post ETF

Percentage of Investors trading different categories of stocks post ETF

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2003

0630

2003

07

2003

08

2003

09

2003

10

2003

11

2003

12

2004

01

2004

02

2004

03

2004

04

2004

05

2004

06

2004

07

2004

08

2004

09

2004

10

2004

11

2004

12

only 成份股

only ETF

only Others

+Others成份股

ETF+Others

+ETF成份股

+ETF+Others成份股

No. of Investors trading ETF and other stocks post ETF

單位：人次

Percentage of Investors trading ETF and other stocks post ETF

Percentage of Investors trading ETF and other stocks post ETF

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

2003

07

2003

08

2003

09

2003

10

2003

11

2003

12

2004

01

2004

02

2004

03

2004

04

2004

05

2004

06

2004

07

2004

08

2004

09

2004

10

2004

11

2004

12

only ETF

ETF+Others

+ETF成份股

+ETF+Others成份股

No. of NEW Investors trading different categories of stocks post ETF

Percentage of NEW Investors trading different categories of stocks post ETF

新進入市場投資人 ( 新市場 ) 投資在成份股、 ETF與其他證券佔當月新市場總人數的比重

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2003

06

2003

07

2003

08

2003

09

2003

10

2003

11

2003

12

2004

01

2004

02

2004

03

2004

04

2004

05

2004

06

2004

07

2004

08

2004

09

2004

10

2004

11

2004

12

new_成份股 new_ETF new_Others new_ +others成份股 new_ETF+Others new_ +ETF成份股 new_ +ETF+Others成份股

Percentage of NEW Investors trading ETF and other stocks post ETF

Percentage of NEW Investors trading ETF and other stocks post ETF

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

2003

07

2003

08

2003

09

2003

10

2003

11

2003

12

2004

01

2004

02

2004

03

2004

04

2004

05

2004

06

2004

07

2004

08

2004

09

2004

10

2004

11

2004

12

new_ETF

new_ETF+Others

new_ +ETF成份股

new_ +ETF+Others成份股

New investors as a percentage of total no. of investors in different categories of stocks

New investors as a percentage of total no. of investors in different categories of stocks

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2003

07

2003

08

2003

09

2003

10

2003

11

2003

12

2004

01

2004

02

2004

03

2004

04

2004

05

2004

06

2004

07

2004

08

2004

09

2004

10

2004

11

2004

12

only成份股

ETF

Others

+Others成份股

ETF+Others

+ETF成份股

+ETF+Others成份股

Theoretical reasons for people to trade ETF

• Diversification• Low transaction cost

– Barring tax considerations (Taiwan does not have capital gain tax), for wealthy long-term investors cost of diversified portfolio could be lower than that of ETF (due to management fee of ETF)

• Trading strategy• Arbitrage

Empirical findings on the ETF in Taiwan

• Weekly tracking error is about 0.862 basis point– Annual tracking error is about 28.4 basis

points from 1993 to 1998 (Elton et al.)

• Cash dividend seems to be the villain for the tracking error in Taiwan

• Premium/discount has improved since the new block trade rule and the exemption of up-tick rule for the ETF component stocks

Suggestions for increasing the demand for ETF

• Market ETF with the help of financial planners

• Increase the frequency of distribution of cash dividend to ETF investors

• Reduce the management fee of ETF• Improve trading mechanism – e.g., blo

ck trade, price limit, and off-exchange trading, etc.

結論及 Q&A• Thank you for your attention• Have a wonderful life