In the US, a high turnover rate of ETF underlying assets generally passes the cost to the investors who purchase those ETFs. Now multiple online traders such as Schwab and TD Ameritrade offer zero fee trading, does the ETF turnover rate still matter ?
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5Just speculation so I can't provide this as an answer, but I suspect that ETF manager aren't considered "retail" traders and thus had a different trading cost structure which is likely not affected much by $0 retail trades.– user12515Nov 29, 2019 at 0:40
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1The ETF management won't have to go through a broker but can likely trade on the exchanges directly. The remaining costs include fees of the stock exchange (negligible at a volume), assorted costs such as for the custodian bank, but most importantly: the spread when trading. The spread is worse for illiquid securities, but the ETF may nevertheless be obligated to trade them.– amonNov 29, 2019 at 5:52
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2 Answers
Yes, but it depends. When trading there are multiple costs
- commissions and exchange fees
- The bid-ask spread
- market impact costs
Commissions and exchange fees are rather small if one is trading at large volumes. The bid-ask spread depends strongly on the liquidity of the target stocks with large caps having a small spread and exotic stocks having a large spread. However, the biggest issue at this level is the market impact. As a rule of thumb, if you trade more than 1% of the average volume one is moving prices.
So a high turnover strategy is less of an issue for a small fund trading liquid large caps but for a large fund trading something like emerging markets small caps, this is going to be a huge issue
does the ETF turnover rate still matter ?
Yes. ETFs are not "retail traders" but "institutional traders" and will have different fee structures. Plus they have implicit transaction costs when rebalancing if they have to pay the bid price when selling and the ask price when buying (called "crossing the spread").
answered Nov 29, 2019 at 17:30
