Consider an actively-managed ETF with a NAV of $23 and an expense ratio of 0.85 that consists of 30 stocks.

Is there a point in buying the ETF, despite the stock picks being very good? The expense ratio is quite high. The number of stocks is quite low, so there's not too much management involved. Why not buy those 30 stocks directly and keep monitoring the holdings of ETF so as to know when to rebalance?

Why do people buy the ETFs when they can just buy the holdings directly?

1 Answer 1


If you're investing in an actively-managed ETF (or mutual fund), you're paying for someone to, well, actively manage the fund by buying and selling based on market conditions. If you believe that the manager can beat the market by buying when a particular stock is low and selling when it is high, it makes little sense to wait for the fund/ ETF to periodically disclose its positions and re-balance your portfolio based on that. If the fund manager is beating the market, by the time you know that they bought a particular stock, the reason for buying it may be totally gone (i.e. the stock was temporarily depressed, the manager bought it then, you find out after the stock has recovered). If the manager is beating the market, replicating their trades at a lag should significantly underperform the fund/ ETF.

Even with only 30 stocks, you'll incur plenty of fees to trade. If you rebalance every quarter and assume that you need to make one transaction per stock per quarter, that's 120 trades a year (10/ month). Depending on where you do your trading, it wouldn't be shocking for that to cost $5 a trade or $600 a year. If you've got a $100,000 portfolio, that's a 0.6% expense ratio for an inferior return. Of course, the exact cost will depend on the broker but that's probably in the ballpark of what you'd pay. Some brokers will give you free trades and make up for it by making a bit more on the spread or give you free trades based on maintaining a relatively large balance but there is going to be some level of cost. If you want to trade at the same frequency that the ETF/ fund does in order to track it more accurately, that's just going to increase the cost.

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    Since actively-managed ETFs are required by law to disclose their holdings every day, is there going to be that much of a difference between when they buy/sell and when they disclose the transaction? We're talking hours here.
    – Zesty
    Commented May 11, 2019 at 22:35
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    @Zesty - It certainly could-- stock prices changing by several percent between one day's close and another's open is not uncommon let alone the change from whenever the fund actually made the trade. Particularly when the fund is doing things like buying or selling a stock that is going to report earnings at the close of business. And, of course, if you plan on making daily trades, then you're looking at hundreds of trades a month-- it's unlikely that is going to cost you less than the 0.85% expense ratio unless you're managing millions of dollars. Commented May 11, 2019 at 22:41
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    Brokers who offer free trades do not "make up for it by making a bit more on the spread". NBBO applies to everyone whether the trades are free or a commission is paid. Not that I'd recommend Robinhood (inferior fills) but there'd be no commission charge there. That's a 0.00% expense ratio. And there are brokers that charge less than $5 a trade. Price wise, this could be done. Duplicating the ETF's performance could not be done due to lag, unless this was a managed funds that adjusted quarterly (open small account with them and mimic in your own account). Commented May 12, 2019 at 0:51

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