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ETF Transaction Costs Are Often Higher Than Investors Realize

James J. Angel, Todd J. Broms and Gary L. Gastineau
The Journal of Portfolio Management Spring 2016, 42 (3) 65-75; DOI: https://doi.org/10.3905/jpm.2016.42.3.065
James J. Angel
is an associate professor in the McDonough School of Business at Georgetown University in Washington, DC.
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  • For correspondence: angelj@georgetown.edu
Todd J. Broms
is the chief executive officer of Broms Asset Management LLC in New York, NY.
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  • For correspondence: todd.broms@bromsam.com
Gary L. Gastineau
is the president of ETF Consultants.com, Inc. in Bonita Springs, FL.
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  • For correspondence: gary@etfconsultants.com
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Abstract

Exchange-traded funds (ETFs) and other exchange-traded products (ETPs) provide simple and efficient diversification and exposure to a wide range of investment asset classes. However, the apparently small bid–ask spreads for many ETFs can mask much higher transaction costs when ETF market prices deviate significantly from contemporaneous net asset values (NAVs). The deviations from NAV are often much greater than the bid–ask spreads suggest. The authors report that ETF closing prices are more than 90 basis points away from the NAV approximately 10% of the time. Investors’ market-on-close (MOC) orders are likely to be executed at prices below the NAV.

TOPICS: Exchange-traded funds and applications, exchanges/markets/clearinghouses, derivatives

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The Journal of Portfolio Management: 42 (3)
The Journal of Portfolio Management
Vol. 42, Issue 3
Spring 2016
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ETF Transaction Costs Are Often Higher Than Investors Realize
James J. Angel, Todd J. Broms, Gary L. Gastineau
The Journal of Portfolio Management Apr 2016, 42 (3) 65-75; DOI: 10.3905/jpm.2016.42.3.065

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ETF Transaction Costs Are Often Higher Than Investors Realize
James J. Angel, Todd J. Broms, Gary L. Gastineau
The Journal of Portfolio Management Apr 2016, 42 (3) 65-75; DOI: 10.3905/jpm.2016.42.3.065
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  • Article
    • Abstract
    • ETF SHARE CREATIONS AND REDEMPTIONS—THE ROLE OF ARBITRAGE FORCES
    • WHAT IS THE COST OF TRADING ETFS?
    • TRADING AT THE MARKET CLOSE
    • ETF NAV QUALITY
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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