You are on page 1of 2

Portfolio Turnover a Necessary Cost

Best practices for minimal impact and maximum implementation


Julie Abbett Portfolio Manager at IndexIQ

Turnover is necessary because it enables an active asset allocator with skill to realize any value that they believe their models can add. Unless one trades on new information, the portfolio will become stale and the alpha will slowly decay over time. Although turnover cannot be avoided one must be cautious and focus on trading as efficiently as possible. This is true especially in volatile markets where both bid/ask spreads and market impact are at their peak. By tying the implicit and explicit cost of trading directly to the models expected return one is actively adjusting to higher transaction cost regimes and generating a higher hurdle rate by which to trade. Although there are no exact apples to apples comparison in analyzing a fund managers transaction costs relative to another we believe that there are certain best practices one may follow. Trading wisely will enable a manager to maintain low total cost per share which includes commission, bid-ask spread and the largest component market Impact. Although there are many factors that will determine total trading costs, we believe maintaining a diligent trading process can keep transaction cost low when measured as percentage of portfolio return. One of these factors is identifying all sources of hidden liquidity as well as timely implementation to reduce shortfall due to alpha decay and further slippage. As a follow-up to our ETF liquidity discussion (The Cost Of Trading ETFs: Look At NAV, Not Volume & Common Myths, Best Practices And Better Trading Execution For ETFs) we have also posted a link to our liquidity webinar highlighting trading large blocks of CPI quickly and efficiently, our IQ Real Return ETF. The webinar, hosted by IndexIQ & Deutsche Bank, focuses on how to implement what we believe are the best practices for trading ETFs in these markets as well as a general rule of thumb to trading ETFs. The objective of CPI seeks investment results that correspond, before fees and expenses, to the price and yield performance of the IQ Real Return Index. The Index seeks to provide a hedge against the U.S. inflation rate by providing a real return or a return above the rate of inflation, as represented by the Consumer Price Index, which is published by the Bureau of Labor Statistics and is a measure of the average change in prices over time of goods and services purchased by households. Webinar Link: https://cc.callinfo.com/cc/s/showReg?udc=1xmefhidqevdb&elq=b850ee2a39cb4bae9fe971cbcd17b222

Please see illustrative visual of ETF Hidden Liquidity (Just the tip of the Iceberg) which goes along with understanding all sources of liquidity and therefore leading to lower transaction costs.

ETF Hidden Liquidity


Just The Tip of The Iceberg
Last Price: 25.90 Intraday Indicative Value: 25.91

CPI
ADVERTISED BEST BID & OFFER
PRICE SIZE 12K

BID1
25.86

ASK1
25.95 500

Direct Market Maker/Authorized Participant Quote


(Reach out to two or more brokers and ask for a principal quote)

Actual Deutsche Bank Quotes:2 H I D D E N

10K

25.89 25.89 25.88

25.92 25.92 25.92

75K

100K

300K

25.87
25.87

25.93
25.94

1M

DARK POOL
(Additional Hidden Liquidity)

1.Actual Bloomberg Market Depth Quotes 2.DB quotes are for illustrative purposes; actual quotes are subject to change

For internal use only