Author Topic: Transaction Cost- Expense Ratio  (Read 2400 times)

oilhunter

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Transaction Cost- Expense Ratio
« on: November 12, 2016, 11:08:11 AM »
I'm curious to know if I'm calculating my expenses correcting when determining cost to manage my own taxable account within etrade. I currently make $1500/monthly increment purchases at 9.99 a transaction.  Over the course of the year that's ~ $120 in transactions costs. The stocks that I purchase are  dividend yielding stocks which I have in DRIP. Hypothetically if I get to a taxable account valve where dividends exceed my expenses then going forward my expense ratio would be zero. Am I correct to assume this scenario? So over the course of 10 years my cost would be $1200. Then my account could self propel on DRIP.  Currently my expense ratio appears to be .666%, on average isn't it like 1-2% if managed by someone else. I know vanguard has (.05/100) expense ratio for their funds. Is it better to continue buying dividend yielding stocks or just open a taxable vanguard account like VTSAX then when i'm ready to retire allocate those fund into dividend paying stocks. Thanks in advance.

Etrade Avg Yearly Transcations Cost / Avg Yearly Contributions
-120/18000 *100 =.666%



StreetCat

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Re: Transaction Cost- Expense Ratio
« Reply #1 on: November 12, 2016, 11:32:07 AM »
Your questions seem to be mixing up a few unrelated topics together.
  • Should you be paying $9.99 per trade?  In my opinion, NO.  20 years ago that was ok, but now there are many brokerages which charge less than that.  If you aren't bound to E*Trade for some reason, consider switching brokerages.  Check out this site: http://www.brokerage-review.com/ - In addition, there are brokerages where you can get free trades.  Merrill Edge provides free trades if you maintain some balance in ML and BankOfAmerica accounts.  Interactive Brokers has $1 trades if you generate at least 20$ in commission per month.
  • Should you be buying individual dividend stocks instead of VTSAX? I have no idea but I don't think that question should be posed with the background of trade commissions.
  • Should you be buying VTSAX in Vanguard?  Again, I don't know what your strategy is, but Vanguard has dividend ETFs and mutual funds also, if you don't want to switch from dividend yielders to total stock market.  I think Vanguard has 20 free trades per year per ETF/MF as long as you are buying Vanguard funds.

oilhunter

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Re: Transaction Cost- Expense Ratio
« Reply #2 on: November 12, 2016, 11:59:10 AM »
StreetCat- you are correct that there are other brokers that provide lesser  fees. If was to leave my current brokerage will I have to individually sell my current positions and incur that transaction cost or will my all my stocks rollover into the new brokerage of my choosing?

StreetCat

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Re: Transaction Cost- Expense Ratio
« Reply #3 on: November 12, 2016, 05:30:33 PM »
If was to leave my current brokerage will I have to individually sell my current positions and incur that transaction cost or will my all my stocks rollover into the new brokerage of my choosing?
You have a few different options:
1. Sell your current positions (and incur trading commissions and possibly capital gains tax) in ETRADE and transfer cash to new brokerage and buy stocks again (and incur another set of trading commissions).
2. Transfer your positions from ETRADE to new brokerage.  ETRADE will charge you for this, but your new broker may re-imburse some of those costs.  You need to check with the new broker.  There are also some caveats with this process.  For example, you may not be able to sell stocks during the transfer.  See this link for more details: https://investorjunkie.com/15125/transfer-brokerage-account/
3. Leave the current positions in ETRADE as they are.  Open account with a new broker and continue your monthly purchases over there with lower commissions.

Another point unrelated to the transfer: You mentioned earlier that you are enrolled in DRIP.  Nothing inherently wrong with that, but I hope you are aware that you need to meticulously track all dividends and the price at which they get re-invested into the stock.  This is needed because when the time comes to sell the stocks (even if you sell them many years later), you will need to know the exact cost-basis to figure out the capital gain amounts and taxes.  I personally don't do DRIP anymore because of that reason.  But, it may still be a good option to you.  Just wanted to bring it up.

MustacheAndaHalf

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Re: Transaction Cost- Expense Ratio
« Reply #4 on: November 12, 2016, 10:15:15 PM »
... I currently make $1500/monthly increment purchases at 9.99 a transaction.  Over the course of the year that's ~ $120 in transactions costs. The stocks that I purchase are  dividend yielding stocks which I have in DRIP. Hypothetically if I get to a taxable account valve where dividends exceed my expenses then going forward my expense ratio would be zero. Am I correct to assume this scenario?

You're viewing dividends as unique benefits when they're not.  You buy stocks and pay a commission, and think you get a dividend.  But if you pay $0 commission to buy Vanguard S&P 500, you still get dividends.  So you are incorrect to view dividends as washing away the expense ratio - it's literally the opposite.  Dividends are eaten away by the expense ratio, as that's how most funds in practice extract the money to keep the fund running.

Look at it this way, after 1 year of investing ($18,000):
S&P 500 index fund with 2% dividends ($360) and 0.05% expense ratio ($9), you receive $351 dividends.
Individual stock purchases with 2% dividends ($360) minus commissions ($120) leaves you with $240 dividends.

The problem isn't the dividends - it's beating a 0.05% expense ratio with $10/trade commissions.  Also, 12 purchases a year give you only 12 stocks, so you don't even wind up diversified.  I think you're losing money on commissions faster than you would with an expense ratio, and you're also less diversified.

Heckler

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Re: Transaction Cost- Expense Ratio
« Reply #5 on: November 13, 2016, 09:51:41 PM »
Good thing to be thinking about your own MER.  I have set myself a $2500 minimum equity and $5000 minimum bonds purchase limit for my ETFs that I also pay $9.95 for.  I also make my regular biweekly contributions to my work plan for the match, and pull it out once a year to my self directed account.  The work plan has higher MER, but no commission to buy or sell.
« Last Edit: November 13, 2016, 09:54:18 PM by Heckler »

Proud Foot

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Re: Transaction Cost- Expense Ratio
« Reply #6 on: November 14, 2016, 09:24:10 AM »
I'm curious to know if I'm calculating my expenses correcting when determining cost to manage my own taxable account within etrade. I currently make $1500/monthly increment purchases at 9.99 a transaction.  Over the course of the year that's ~ $120 in transactions costs. The stocks that I purchase are  dividend yielding stocks which I have in DRIP. Hypothetically if I get to a taxable account valve where dividends exceed my expenses then going forward my expense ratio would be zero. Am I correct to assume this scenario? So over the course of 10 years my cost would be $1200. Then my account could self propel on DRIP.  Currently my expense ratio appears to be .666%, on average isn't it like 1-2% if managed by someone else. I know vanguard has (.05/100) expense ratio for their funds. Is it better to continue buying dividend yielding stocks or just open a taxable vanguard account like VTSAX then when i'm ready to retire allocate those fund into dividend paying stocks. Thanks in advance.

Etrade Avg Yearly Transcations Cost / Avg Yearly Contributions
-120/18000 *100 =.666%

The formula you have above would work better for comparing against purchasing a fund with a front end load.  If you are wanting an annual ER for your stock portfolio a better way would be to calculate your annual transaction costs/yearly balance

Year 1 - 120/18k (or market value at year end)
Year 2 - 120/36k
Year 3 - 120/54k

This would get you an ER for comparison to the ER of something like VTSAX. 

The other way would be to average out the commissions over the holding period to calculate the ER.  This is what I do for my individual stocks.  I treat all commissions paid as if they applied for the full year and then divide by the years held.  Total the amount for the year and divide by the year end market value to get my "ER"

Vagabond76

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Re: Transaction Cost- Expense Ratio
« Reply #7 on: November 14, 2016, 10:00:08 AM »
StreetCat- you are correct that there are other brokers that provide lesser  fees. If was to leave my current brokerage will I have to individually sell my current positions and incur that transaction cost or will my all my stocks rollover into the new brokerage of my choosing?

Don't forget that stocks are a piece of property, and the brokerage just holds that property for you until you need an efficient way to sell it.  You can move your property from one holder to another, but you may have to pay a processing fee.  I read that Etrade's account transfer fee is $60.  I'm sure there is a small cost to the brokerage to close an account and transfer shares somewhere else, but I think the real motivation is to deter people from jumping ship when one brokerage undercuts another by a $1/trade.

oilhunter

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Re: Transaction Cost- Expense Ratio
« Reply #8 on: November 16, 2016, 07:49:02 AM »
Proud Foot-
I'm curious to know if I'm calculating my expenses correcting when determining cost to manage my own taxable account within etrade. I currently make $1500/monthly increment purchases at 9.99 a transaction.  Over the course of the year that's ~ $120 in transactions costs. The stocks that I purchase are  dividend yielding stocks which I have in DRIP. Hypothetically if I get to a taxable account valve where dividends exceed my expenses then going forward my expense ratio would be zero. Am I correct to assume this scenario? So over the course of 10 years my cost would be $1200. Then my account could self propel on DRIP.  Currently my expense ratio appears to be .666%, on average isn't it like 1-2% if managed by someone else. I know vanguard has (.05/100) expense ratio for their funds. Is it better to continue buying dividend yielding stocks or just open a taxable vanguard account like VTSAX then when i'm ready to retire allocate those fund into dividend paying stocks. Thanks in advance.

Etrade Avg Yearly Transcations Cost / Avg Yearly Contributions
-120/18000 *100 =.666%

The formula you have above would work better for comparing against purchasing a fund with a front end load.  If you are wanting an annual ER for your stock portfolio a better way would be to calculate your annual transaction costs/yearly balance

Year 1 - 120/18k (or market value at year end)
Year 2 - 120/36k
Year 3 - 120/54k

This would get you an ER for comparison to the ER of something like VTSAX. 

The other way would be to average out the commissions over the holding period to calculate the ER.  This is what I do for my individual stocks.  I treat all commissions paid as if they applied for the full year and then divide by the years held.  Total the amount for the year and divide by the year end market value to get my "ER"
The other way would be to average out the commissions over the holding period to calculate the ER.  This is what I do for my individual stocks.  I treat all commissions paid as if they applied for the full year and then divide by the years held.  Total the amount for the year and divide by the year end market value to get my "ER"
[/quote]

Example XYZ Stock
year 1-(15*100)+9.99 = 1509.99
year -2 - (15*100)+9.99=1509.99 ( I buy more of that same stock again)

If Held for 5 years
19.98/5 $3.99 commision cost for XYZ stock over a 5 year period.
 
This this example above what you meant?

Proud Foot

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Re: Transaction Cost- Expense Ratio
« Reply #9 on: November 16, 2016, 01:50:34 PM »
Example XYZ Stock
year 1-(15*100)+9.99 = 1509.99
year -2 - (15*100)+9.99=1509.99 ( I buy more of that same stock again)

If Held for 5 years
19.98/5 $3.99 commision cost for XYZ stock over a 5 year period.
 
This this example above what you meant?

Thats pretty close. I have mine set up in a table so using your example it would be:

Year Paid   Commissions
Year 1        9.99
Year 2        9.99
Year 3        0
Year 4        0
Year 5        0

So my "yearly" commissions would be
Year 1 - 9.99
Year 2 - 14.99 (9.99/2 + 9.99)
Year 3 - 8.33 (9.99/3 + 9.99/2)
Year 4 - 5.83 (9.99/4 + 9.99/3)
Year 5 - 4.50 (9.99/5 + 9.99/4)

I hold a small (23) number of individual stocks and make buys/sells infrequently so this is easier for me.  If you have a large number of stocks or make frequent buys/sells it would make this a lot more time consuming to track.

Scandium

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Re: Transaction Cost- Expense Ratio
« Reply #10 on: November 16, 2016, 02:34:10 PM »
Also, 12 purchases a year give you only 12 stocks, so you don't even wind up diversified.  I think you're losing money on commissions faster than you would with an expense ratio, and you're also less diversified.

So after 10 years you can have max 120 different stocks, for a cost of $1,200.
Or you can have 3,000+ different stocks for a total cost of ~$500 (VTSAX)

Even with the ER being ongoing that's no contest in my opinion. I shudder at being so undiversified! And presumably OP would have to sell some of these stocks when they cut dividends, so there's ongoing costs there too, not to mention maintenance with keeping track.