8/27/2023 0 Comments Notional value of dia etfIt is important to note that the examples omit some trading nuances that should be considered. So, what if the current holding position was cut in half, leading to a $6 million notional trade value? As shown below in Part 2 of our hypothetical example, as the size of the portfolio turnover increases, so do the costs - compounding the cost advantage of XYZ over ABC, even though ABC has a lower expense ratio. But any rebalancing trades are applied only to the notional value traded - in this case the $2 million, which is just a portion of the total portfolio value. This is similar to the application of an expense ratio. When a position is established, the trading costs are applied to the total notional dollar figure for ABC ETF, this would be the 0.05% applied to the $10 million position.įigure 3: Hypothetical Example: Rebalance Trade Highlights Cost-Analysis Nuances, Part 1 And the more frequent the rebalancing, and the greater the size of the rebalance, the greater the impact on the total cost of ownership. The following hypothetical example compares the overall cost of two ETFs that seek to track the same index but have different expense ratios and rebalancing costs (after a hypothetical 20% annual gain on the original investment.)Īs shown in Figure 3, trading costs make Fund XYZ, the fund with the higher expense ratio, the lower-cost option in this annual rebalance scenario. Therefore, much like calculating the money paid in fund fees on an investment, the calculation of trading costs must also be included in any model used to make pre-investment decisions, as well as during the ongoing review of the TCO for a particular ETF. As a result of differences in secondary market liquidity profiles, some higher fee funds have lower bid-ask spreads, and some lower fee funds have higher bid-ask spreads. Low fees do not naturally lead to low trading costs and, as a result, the lowest TCO.įigure 1 plots the 30-day average bid-ask spread versus the expense ratio for the 100 largest US equity ETFs, clearly illustrating the lack of correlation between ETFs’ expense ratios and trading costs. Low Expense Ratios Don’t Always Mean the Lowest TCOīecause an ETF can be bought and sold on an exchange like a stock and incurs trading costs, your TCO evaluation should include both trading and holding costs. However, it's important to evaluate an ETF's total cost of ownership (TCO). While the last three are often heavily scrutinized, many analyze cost more simply, focusing solely on an ETF’s expense ratio.
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