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Index fund trading costs are inversely related to fund and family size

Author

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  • Adams, John
  • Hayunga, Darren
  • Mansi, Sattar

Abstract

Trading costs are a significant, but unobserved, drag on mutual fund performance. Because an index fund does not engage in securities selection or market timing, its trading costs are equivalent to its underperformance relative to its benchmark plus any securities lending income it earns. Using a large sample of index funds, we find positive returns to scale at the fund and family levels. We also find greater fund size helps alleviate the higher trading costs associated with illiquid equities and that net trading costs are comparable in magnitude to expense ratios.

Suggested Citation

  • Adams, John & Hayunga, Darren & Mansi, Sattar, 2022. "Index fund trading costs are inversely related to fund and family size," Journal of Banking & Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jbfina:v:140:y:2022:i:c:s0378426622001212
    DOI: 10.1016/j.jbankfin.2022.106527
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    References listed on IDEAS

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    Cited by:

    1. Dannhauser, Caitlin D. & Spilker, Harold D., 2023. "The Modern Mutual Fund Family," Journal of Financial Economics, Elsevier, vol. 148(1), pages 1-20.

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    More about this item

    Keywords

    Economies of scale; Index funds; Trading costs;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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