larryswedroe wrote:...Second, to Nisiprius's (And Victoria's) point on low fees, if the fund charged 75bp would that be "obscene?"
I did not use the word "obscene." I did not say that 0.75% would be "obscene" and I did not say that 1.5% is "obscene."
I said that Morningstar does not categorize it as a "low cost" fund
. They categorize it as being an "average cost" fund in the "multialternative" category.
(After saying twice "according to Morningstar" I then said simply "it's not low-cost," but the point is that isn't just my lay opinion, it is also the opinion of an authoritative source).
The question of whether long-short funds should have their expense ratios divided by two when comparing costs is a separate question.
In your opinion, Larry, do you think that the expense ratio of the Direxion Daily S&P 500 Bull 3x Shares, SPXL, is 0.99%, or should we be dividing it by 3 and calling it "effectively 0.33%" to recognize the fact that we are getting three times the exposure to the S&P 500's daily movements as we would be getting in SPY?
For what it's worth, and "low cost" was never my argument, the low-volatility version of the fund is "low" cost for the category according to Morningstar. And from what I remember from poking around and checking other funds in the category, the low-volatility version has about similar volatility compared to many of the competitors, with lower than average market beta, R^2, and traditional asset class exposures than many of the others. It's had higher performance than most, but that's a very short 1-year history. But really, the cost categorization by Morningstar isn't really a value assessment at all, just a comparison to peers in the category. I don't think it's that meaningful or worth pointing out.
Now and then, I wonder how the arguments would be framed if they came out with QSLIX (the low volatility version) first and then released QSPIX (normal volatility) as a high volatility variant with higher ER.
Regardless, to me, 0.85% is still very high. The 1.50% makes me want to cry (slight hyperbole, but only slight). But the alternatives are sadly lacking. *sigh*
And I'm not Larry but I'd say that every fund's cost needs to be evaluated in the context of exposures and costs of alternatives. For example, with a long-only active stock mutual fund, what you get is primarily the passive stock exposure with some alpha (positive or negative) riding on top that's based on the manager's particular stock choices, the deviations from the benchmark. The question is whether or not the manager's alpha—which is very hard to estimate for a particular manager, but has been low or close to zero for the average mutual fund manager, at least in US stocks—is worth the additional ER over the passive alternative. And tax and other considerations too, of course, and how it fits into an entire portfolio allocation.
Dividing ERs by levels of exposures as with your leveraged ETF example is just one way of looking at things. It may or may not provide some useful insight. Realistically, you can't just own 3x of SPY rather than 1x of SPXL in your portfolio because you run out of money, so it's not quite fair. For example, if you mean to be 40% SPXL, 60% BND (total bond), you can't really replicate this with SPY as you can't go above 100% SPY—and even then, you'd be missing out on the bond exposure, never mind the vagaries of daily rebalancing. To get comparable exposures you'd have to use leverage on your own. On a side note, in practice getting leverage on your own is actually probably better than SPXL, as S&P e-mini futures are a good alternative.