Rebalancing and Turnover Impact Trading Costs
When questioning whether to focus more on execution costs or on management fees, other factors may also be worth considering. For example, the rebalance frequency of your strategy will determine trading costs – the more frequently rebalancing is needed, the higher the costs to trade. Additionally, when the size of portfolio turnover rises, so do the associated trading costs.
Striking the Right Balance
It’s not always black or white when deciding whether to focus on execution costs or on management fees. There are grey areas which require you to strike a balance between both cost components.
For example, consider a standard 60/40 core allocation comprised of three ETFs: an Australian equity, a global ex-Australia equity and a broad global bond fund. While rebalanced monthly based on a momentum signal, the assets are strategic and will be held for a long time. Notably, weights don’t go to zero while rebalancing, given that the model solution is meant to provide broad diversification to global assets.