Oct 11, 2010
Following up on the math of ETF trading/investing expenses. This is more important in terms of trend than anything but think about this Ameritrade offer from another angle.
1) Assume you do 30 round-trip trades in a given year for 60 total trades (30 buys and 30 sells).
2) Let's say 50% are closed within 30 days and 50% are held longer than 30 days.
The overall commissions would be 15 x $19.99 = $299.85
Using a $200,000 account value, this would represent about 15 basis points in commissions (0.15%).
If we assume that the average expense ratio is 40-60bps, then the total cost is 55-75 basis points per year (0.55% to 0.75%).
Keep in mind that daily fund pricing includes the deduction of the expense ratio. There are 252 trading days in a year and if a fund charges 30 basis points, then there is a daily deduction of 0.0012% per day taken out of the net asset value. This is in turn reflected in the daily closing prices -- the point being that the expense ratio does not need to be deducted again when we are already using closing prices in our analysis at ETFreplay.com -- thus the costs are just the commissions, which are 15 basis points in this example. For a $500,000 account, the total annual cost of commissions is just 6 basis points 0.06%
While much time is spent discussing expense ratios and savings -- the differences between ETFs are trivial in context of markets that can move percentage points in just a few hours.
The bottom line is that ETF investing is extremely low cost. Comparing expense ratios between ETFs at this low level is a waste of time. It just isn't important.
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