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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
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  • Fees And Holding Period. 4 comments
    Jan 17, 2013 6:34 PM

    1/17/2013

    Usually retail investor pays significant brokerage fees to trade, while some ETF charges quite modest fees. I compared both fees (see the table below) with simple assumptions - ETF can be traded for free (valid for some funds in some brokerages), annual increase of stock or ETF price is 10%, no taxes on capital gains and dividends, initial ETF fees is 0.05% from investment value while flat brokerage fees are equal 0.2% for initial purchase. Last two numbers are real, for example, Vanguard's fees is 0.05% for VOO and Scottrade charges flat 7$ for a trade (I assume $3,500 investment, so it is 0.2%. If you're lucky and got ten-bagger you pay 0.02% when you sell it).

    YearETF Fees /AnnualETF Fees /CumulativeCapital GainsBroker Fees/1wayBroker Fees/Round trip
    10.05%0.05%1.0000.20%0.40%
    20.055%0.11%1.1000.18%0.38%
    30.061%0.17%1.2100.17%0.37%
    40.067%0.23%1.3310.15%0.35%
    50.073%0.31%1.4640.14%0.34%
    60.081%0.39%1.6110.12%0.32%
    70.089%0.47%1.7720.11%0.31%
    80.097%0.57%1.9490.10%0.30%
    90.107%0.68%2.1440.09%0.29%
    100.118%0.80%2.3580.08%0.28%
    110.130%0.93%2.5940.08%0.28%
    120.143%1.07%2.8530.07%0.27%
    130.157%1.23%3.1380.06%0.26%
    140.173%1.40%3.4520.06%0.26%
    150.190%1.59%3.7970.05%0.25%
    160.209%1.80%4.1770.05%0.25%
    170.230%2.03%4.5950.04%0.24%
    180.253%2.28%5.0540.04%0.24%
    190.278%2.56%5.5600.04%0.24%
    200.306%2.86%6.1160.03%0.23%

    As anybody can see ETF fees are smaller than brokerage fees during first 5 years and after it brokerage fees for round trip are smaller when cumulative ETF fees. Therefore a long-term retail investor can "beat" even cheap ETF if (s)he hold stock long enough.

    For more rigorous but a bit outdated study see

    [1] Direct vs. Indirect Diversification
    Keith V. Smith, John C. Schreiner
    Financial Analysts Journal, Vol. 26, No. 5 (Sep. - Oct., 1970), pp. 33-38

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Comments (4)
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  • healthythoughts
    , contributor
    Comments (2966) | Send Message
     
    Yes, I see where it could make a difference for some. For me I purchase & hold, reinvesting dividends. There are no fees for reinvesting. I hold SDY VIG & VYM in 2 IRAS (1 Trad/1 Roth) so no capital gain tax

     

    Thanks for the info
    18 Dec 2013, 05:03 PM Reply Like
  • Emerging Investor
    , contributor
    Comments (12) | Send Message
     
    SDS,

     

    Good Illustration of fees and expenses. I agree brokerage fees are small relative to expense ratios assuming you have enough assets and hold them long enough.

     

    I do however feel the expense ratios will not remain constant for the extended period you listed. The expenses from managing a fund are not closely related to the funds value. The expenses will tend to increase more so with inflation. Competition between asset management companies keep them from keeping all of the compounded gains they could receive from an unadjusted expenses ratio. To illustrate in 2004 SPY’s expense ratio was 0.11%. During this ten year period the return of SPY averaged 6.5% per year. Assuming 3% cost increases per year, and assuming my math is correct, I calculate a current expense ratio of SPY of about 0.08% which is close to the current 0.09% it is right now. Using your VOO example I would predict based on 3% inflation expectations and 8% average yearly return that in 2023 the expense ratio of VOO would be about 0.03%.

     

    For more details on expense ratios can be found here: http://seekingalpha.co...

     

    LONG: NOSIX, BEN, AMP
    26 Nov, 12:14 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3479) | Send Message
     
    Author’s reply » healthythoughts/Emerging Investor

     

    Any ETF or MF fees are directly related with market price of the fund (NAV * number of shares). The number of shares fluctuates strongly for a MF with cash in-/out-flows and changes sometimes for an ETF when it issues/cancels blocks of shares. Any fund manager has vested interest to increase NAV which leads sometimes to quite risky behavior. I ignored these facts and simple assumed that a fund reflects average stock market trend (well it was not precisely 10% gain but my blog is just illustration). As result expenses directly proportional to paper value of investment. As you know paper value might include capital gain which is kind of imaginary until investor releases them. So you pay for something you don't really have after the payment.

     

    On another hand I assume that a broker charges flat fees for a trade, so % of expenses reduces with trade size. If I spent 1% (7$) for 200 shares bought at $3.5 and sold these 200 shares at $35.00 my round trip cost me 1.1% not 2%. In contrast with MF/ETF each time I pay I get something (well nowadays electronic note in a database).

     

    SDS
    27 Nov, 12:37 PM Reply Like
  • healthythoughts
    , contributor
    Comments (2966) | Send Message
     
    So far so good for me....
    28 Nov, 10:27 AM Reply Like
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