The recent rise of passive and smart beta strategies has resulted mainly from the success of ETFs. On paper, these products provide a transparent and cheap access to financial markets. In practice however, things may not be that simple.
This study1 examined the total cost of ownership involved in investing in ETFs based on plain vanilla equity, bond and commodity indices available to European investors. Total cost of ownership not only includes the official total expense ratio of a fund, but also accounts for the impact of bid-ask spreads, and shortfall versus the index that is being tracked.
Investments of either 10,000 or 1 million euros are considered. Total cost of ownership for a one-year holding period is estimated to range from 0.4 to 1.4% for equity ETFs, 0.2 to 0.5% for government and high-grade bond ETFs, 0.5 to 0.8% for high-yield ETFs, and 1.0 to 1.6% for commodity ETFs.
These costs are probably higher than many investors would expect to pay for what are supposed to be very cheap passive solutions.
1 Layes, ‘Total Cost of Ownership of ETFs’, presentation at Robeco 10th Knowledge Center conference, 2017.
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