Solactive: More competition will cut out 'hidden' turnover costs by index providers

Staggered rebalancing will help

Investors are paying "significantly" higher turnover costs due to index arbitrageurs taking up opposite positions at the point when an index rebalances, according to research conducted by Solactive.

The white paper, entitled (The Hidden) Index Turnover Costs: The Visible Price of Transparency, said due to the rules-based nature of indices and the fact rebalancing days are highlighted in advance, index arbitrageurs can anticipate these changes in indices. Arbitrageurs can bid up, or down, the price of stocks which are either being added or removed from an index meaning investors in the index pay more when the rebalancing takes place, it said. Therefore, this leaves investors with an implicit cost causing a drag on performance, which may not have been anticipated when investing in ...