Shedding Light on Invisible Costs:Trading Costs& Performance
By Edelen, Evans and Kadlec
http://www.cfainstitute.org/learning/pr ... .n1.6.aspx
Here are some of the stats:Abstract
Industry observers have long warned of the “invisible” costs of fund trading, yet evidence that these costs matter is mixed because many studies do not account for the largest trading-cost component—price impact. Using portfolio holdings and transaction data, the authors found that funds’ annual trading costs are, on average, higher than their expense ratio and negatively affect performance. They also developed an accurate but computationally simple trading-cost proxy—position-adjusted turnover.
Segment............... Stated Expense Ratio..Average Turnover.........Cost of Turnover/Trading*......cost per 100% of turnover
All Funds............................1.19%................82%....................1.44%..................................1.76%
Small Cap Growth..................1.39%..............119%....................3.17%...................................2.66%
Small Cap Blend....................1.20%................72%....................2.32%..................................3.22%
Mid Cap Blend......................1.22%................71%....................1.44%..................................2.03%
Large Cap Blend....................0.98%................52%....................0.61%..................................1.17%
*i.e. hidden additional expense ratio
The stated expense ratio column shows the average stated expense ratio for the different fund categories, as per the prospectus. The average turnover is also stated in the prospectus. The cost of turnover/trading is the authors' estimate based on the methodology in the paper- this is the "hidden" expense ratio that must be added to the stated expense ratio to get to the true cost of owning the fund. Their basic point is that this is often greater than the stated expense ratio.
The final column is the ratio of the two proceeding columns. This is meant to be helpful for a specific fund that one might be interested in. For example if you know that a midcap fund has average turnover of 50%, then one would estimate the hidden expense ratio from trading costs at 1.015% (=50%*2.03%).
Small cap growth funds had the worst turnover and highest trading costs (aka hidden expense ratio).
cheers,