trading-costs-and taxes.jpg

We have the same incentives to reduce hidden ETF fees as an individual investor. When ETFs are selected, both sides of the spectrum are taken into account (fees and investment performance/potential upside). With the industry moving to a no-commission/low-investment-fee model, we have numerous low-cost ETFs to choose from when building portfolios.

For example, the hidden fees associated with Schwab’s Large Cap Stock Index ETF SCHX are three times cheaper than the industry standard S&P 500 Index ETF SPY (0.03% for SCHX versus 0.09% for SPY). Schwab’s SCHX is also cheaper than Vanguard’s VV ETF (0.03% for SCHX versus 0.04% for VV).

Hidden ETF fees and taxes are always relevant. However, let's assume you had a $1,000,000 portfolio invested in the S&P 500 Index in October 2007. If your primary objective was to minimize ETF fees and transaction-related taxes, you would have lost 58% before the stock market bottomed on March 9, 2009.  A loss of 58% equates to $580,000 in principal. The hidden annual fee on $1,000,000 invested in Schwab’s Large Cap Index ETF would come to approximately $300. Compare the $300 ETF fee hit to your hard-earned principal to the $580,000 loss in the 2007-2009 bear market example.

Moral of the story, principal protection is infinitely more important than hidden ETF fees or tax implications. Many investors worry about pinching pennies rather than protecting dollars. Trading frequency and taxes are important, but they are not nearly as important as protecting your hard-earned principal. 

Net worth-destroying bear markets are not rare events. It is not a question of if another devastating bear market is coming but simply when the next devastating bear market is coming. If you focus on minimizing trades, you may regret that decision a few months into the bear market episode. It is best to build your shelter during a bull market; the CCM Market Model is a form of probabilistic shelter for your investments.



ETF information as of September 2019. Fees associated with third-party ETFs are subject to change. Figures above are presented for illustrative purposes only.