The Intangible Costs of ETF Ownership

[Ad Orientem]

http://news.morningstar.com/articlenet/ ... ?id=557556

[Tortoise]

If I understood the article correctly, the author's main thesis is that aside from the expense ratio, ETFs have two "intangible costs":

• Bid-ask spread
• Index tracking error

For buy-and-hold investors who trade only infrequently, the bid-ask spread is essentially a non-issue.

As for index tracking error, who would ever consider that a "cost"? It's random noise. If the tracking error is consistently negative, seeming never to revert to the mean, then perhaps that's really just an example of bid-ask spread in disguise. Maybe the fund management is trading illiquid securities in the portfolio often enough actually to cause a downward drag relative to the target index.

I just thought the author's inclusion of index tracking error as an "intangible cost" of ETF ownership might be a bit misleading. Maybe a better example of an intangible cost would have been portfolio turnover since higher-turnover funds tend to result in investors getting slapped with higher tax bills (even ignoring the costs of bid-ask spread in the presence of high turnover).