ETF/No Load Fund Trading: How Important Are Fund Trading Costs?

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Bloomberg had an article titled “Soft-Dollar, Trading Costs Devour Fund Returns,” which describes the effect of various expenses and trading costs on overall mutual fund returns.

The story goes on to look at a fund manager’s turnover rate, which is the amount of trading expressed as an annual percentage of fund assets. For example, a turnover rate of 100% tells you that the value of the entire portfolio was traded in a year. Yes, this does happen; in some fund orientations more than in others.

That in itself is an irony, because the fund manager obviously feels that, in order to increase performance he needs to discard losing stocks and add more on the winning side. While this makes good business sense to me, there is a double standard here. Why are you, as a fund investor, not supposed to (or only with a penalty) to do the same thing by dumping underperforming funds and replacing them with better ones?

Makes it pretty clear whose interests are priority and whose are not.

The gist of the story is that all fund expenses decrease the shareholder’s return. However, keep in mind that this is only an issue for Buy & Hold investor, who will not only be paying these expenses in good times, he will also be paying them as his portfolio suffers in a bear market.

Following trends, I never concern myself with a fund’s expense ratio. I want to be invested in a good performer and will only stay in it long enough until my sell stops, or a major trend reversal, takes me out of the market. While the entire mutual fund community hates this selfish profit motivated approach, it allows you to stick to the basis of investing, which is to make your money grow and not be loyal to a fund company that has absolutely no loyalty towards you.

Speaking of selfish and profit motivated, always remember, a mutual fund company’s main goal is the same as the one for any corporation, including the one you work for: To make money for the company; nothing else. If you happen to grow your portfolio along the way, that’s great, but not necessary for the fund company to survive.

Here’s a more humorous way to look at it: “Fall in love with your wife,” but “fall out of love with your mutual fund,” and focus only on those that can help you grow your portfolio.

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