The Expensive Ingredient of Cheap ETFs
by Jason Zweig
(This article originally appeared in The Wall Street Journal, April 14, 2017)
One portfolio manager estimates that the hidden costs of trading exchange-traded funds exceed $18 billion a year.
The costs of trading are one of the worst destroyers of investment returns. That’s a fact of life in the markets, although it’s easy to overlook in exchange-traded funds, in which commissions and management fees have shrunk almost to zero.
And during placid markets like today’s, when buying or selling tends to become cheaper, investors can form a bad habit of ignoring the costs of trading. That can come back to haunt you when turbulence resumes and trading becomes more expensive.
Often dirt-cheap to own, ETFs can still be costly to buy and sell. In a study just published in the Financial Analysts Journal, portfolio manager Antti Petajisto of LMR Partners, a London-based hedge fund, looked at about 1,800 ETFs from 2007 to 2014. He wanted to see how often, and how much, their market prices differed from the value of their underlying assets.