John Bogle suggests the transaction costs incurred by funds (and thus the lag they have on their investments) should be considered as 1% of the fund's portfolio turnover (0.5% for buy, and 0.5% for sell).
What's the theory behind this? And how is the cost relative, when typically transaction costs are defined as fixed amounts?
The portfolio turnover costs of individual funds also tend to persist. Transactions cost money, and we estimate that turnover costs are roughly 0.5 percent on each purchase and sale, meaning that a fund with 100 percent portfolio turnover would carry a cost to shareholders of about 1 percent of assets, year after year. Similarly, 50 percent turnover would cost about 0.50 percent; and 10 percent turnover would cost about 0.10 percent, and so on. Rule of thumb: turnover costs equal 1 percent of the turnover rate.
-- John Bogle, 2007, The Little Book of Common Sense Investing