So if you are buying and selling individual securities, you are facing a variety of possible transaction costs. There is the value of your time spent calculating and executing transactions. You may have fixed costs associated with maintaining the trading account even if there is no per-transaction cost. You might face some bid/ask spreads. Sometimes you might take longer to execute a transaction than your plan strictly requires (in practice a lot of us leave a little sitting in sweep accounts periodically, that sort of thing). Sometimes you may net out transactions in a way that generates tax drag (I note this is particularly likely for rolling positions). And so on.Thanks! If you wanted to expand on what ETFs do to avoid tax drag, and what it costs to manage individual bond holdings, I'm all ears.
Things like index ETFs are actually doing a bunch of things to try to minimize variance from the target index. Like, they typically give themselves some wiggle room to starting buying something right before it enters their index, or start selling right before it leaves, to help smooth things out. They are also typically using a process known as creation and redemption which involves working with large institutional investors known as Authorized Participants to help improve efficiency and index tracking. See here for a cool explanation of that:
https://www.schwabassetmanagement.com/c ... -mechanism
The result of all this is an index ETF should have very close to exactly the tax efficiency of the index itself, and no contribution from all that other stuff.
But you have to pay an ER. From my perspective, with really low ERs, it is money I am happy to spend even with really large balances--assuming the index in question is what I want.
Statistics: Posted by NiceUnparticularMan — Mon Sep 15, 2025 12:25 pm — Replies 214 — Views 22754