Performance Perspectives Blog

Transaction costs in benchmarks: okay or not okay?

by | Apr 29, 2022

One of the challenges with market indices is they do not include transaction costs; and this has always been seen as a disadvantage for portfolio managers, whose trades typically come with such costs. And despite the fact that these charges have reduced significantly over the years, sometimes to zero, their inclusion in their trades and absence from the index provides a slight hurdle for them to overcome.

Well, at least one market index provider is introducing indexes that include transaction costs; and, we have advocated for some time the use of exchange traded funds (ETFs) as substitutes for market indexes.

Is there anything wrong with using benchmarks that include transaction costs? Nothing we can think of. In fact, it seems to be a perfect idea. The only key is understanding what those costs are and how they compare with what the manager is paying: it would be unfair if the index is reflecting higher fees than the portfolio

What do you think? Please let us know.

p.s., this is my first blog post in a VERY long time. As with our newsletter, I am attempting to make a comeback! If you have any topics you’d like me to address, please let us know. Thanks!