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Rebalancing Costs Drag US Index Trackers by Nearly $4 Billion Yearly

ETF Exchange traded fund Trading Investment Business finance concept on virtual screen.

Passive exchange-traded funds are losing nearly $4 billion yearly due to the use of mechanical trading strategies, FT reported.

A Ph.D. student at the University of Illinois found that US index-tracking funds are losing up to $3.9 billion a year with such strategies, with investors with a $2-million passive mutual or exchange-traded funds losing $29,000.

Sida Li noted the “large” trading cost of mechanical rebalancing, which she said could compare with total management fees charged by managers of exchange-traded funds.

The study also found that most of equity ETFs in the United States transact at the 4 pm closing prices during the rebalancing days to minimize tracking errors, along with the pre-announcing the rebalances.

Li said the results indicated that the price of stocks ETFs buy on average increases by 67 basis points in the five trading days before the rebalance and later fall 20 basis points in the next 20 days.


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