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Why Don’t Investors Trade ETF
周行一 Edward H. ChowProfessor of Finance, NCCU
Dean of College of Commerce2006/7
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
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
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
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
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.