Index Turnover Costs

The visible price of transparency

The Index Turnover Costs paper analyzes the additional cost paid by investors in order to passively track a benchmark. The selection of an index as a benchmark has been tied to the cheap cost to reference it; however, in this research paper, Solactive AG quantifies the additional turnover costs that investors implicitly pay due to arbitrage activity – days before a transparent rebalancing takes place when many assets are tracking the index. In most cases, it turns out that the additional turnover costs can be as high as the price to track the index.

Using a Eurozone blue-chip index, the paper finds turnover costs are significantly higher than zero. In addition, the paper discusses how turnover costs can be decreased. The suggested measures include: 1) having multiple indices in the same geography and market, 2) reducing the index turnover by adding turnover constraints into the index creation’s methodology, and 3) implementing a transparent rebalancing procedure with a long buffer time before the rebalancing date.