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ETFs: Dicing mouse turds

The above expression is from Mauldin Economics about the ridiculousness of some ETFs fees. When I started my career many moons ago (like 25 years ago) brokerage fee were substantial, granted virtually no trading was electronic (Don't want to exaggerate either) but the reality is that until the "Big Bang" of 2007 brokerage cost were a substantial numbers.

To this day there remain closet indexers (Vanguard, Jarulosky & many many others) that will charge clients more than 1% in annual management fee, they will not on the other hand charge for each transaction.  The idea was that it would reduce churn (the number of time your broker sells shares from your portfolio to generate commission), but with fees becoming so low the cost of churn is also falling on ordinary (non-ETF) share transactions.  So the question investors have to ask is why bother with fixed commission since even if there is churn in your portfolio the costs are minimum.  Anyway, we are getting away from the real conversation.  ETFs are the pointy shiny bit of the market, its where all the trading is electronic -- machine driven trading occurs (and it has for years...).  Because ETFs are rule based investments -- there are no allocation discussion, limited hedging -- you are simply buying the underlying shares of the ETF.

The race to the bottom in the ETF segment (Exchange Tradable Funds) is the perfect example, with some ETF fee being as low as 0.04% -- so on $10,000 purchase your brokerage fee is $4.00 -- that's not a lot, in fact the firm issuing that ETF is probably losing money.

The issue for investors becomes what are you getting for your money?  That's the hard part, because liquidity and volatility redemption and new issuance are the name of the game; sure you like it when your ETF is trading near PAR (the value of the underlying shares), but what happens if it goes above PAR (don't laugh it happens -- especially for SPROT's Gold ETF), or trades at a discount...

You see dear investor the problem is always the same, when things are good, all these instruments are neat and tidy, when the "solids" hit the fan its much more complicated.

Anyway Mauldin's point is that with the ridiculously low fees that are now on offer from virtually all ETFs its harder for investors to choose because the low hanging fruits comparison are gone!


Have a good weekend

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