Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance

Industry observers have long warned of the “invisible” costs of fund trading, yet evidence that these costs matter is mixed because many studies do not account for the largest trading-cost component—price impact. Using portfolio holdings and transaction data, the authors found that funds’ annual trading costs are, on average, higher than their expense ratio and negatively affect performance. They also developed an accurate but computationally simple trading-cost proxy—position-adjusted turnover.