The real cost of rotating your portfolio every month: commissions, spread, currency and taxes
A backtest usually includes an estimated commission, but the real cost of following a strategy depends on your broker, your capital and the ETFs you use. This guide lists the costs one by one and works through an example with figures from the site.
The five costs
1. Commission per order
Many brokers charge a percentage with a minimum per trade. With a minimum of $1 to $5 per order, a small portfolio pays proportionally far more than a large one. Some offer a list of commission-free ETFs or monthly limits: check the current terms, because they change.
2. Bid-ask spread
It is the difference between the price at which someone buys from you and the price at which they sell to you. In large, liquid ETFs it is small; in thinly traded ETFs it can be larger. It does not appear as a line on the statement: it is paid in the execution price.
3. Currency
If the ETF trades in a currency other than your account's, there is a currency exchange on every purchase and sale. Some brokers apply a margin on the exchange rate. Choosing the share class that trades in your currency (where one exists) avoids this friction.
4. The ETF's internal costs
The expense ratio is deducted from the fund's value every day without you seeing it. The difference between the index's return and the ETF's (tracking difference) also includes other factors.
5. Taxes
This is normally the biggest cost, and also the most variable. Every sale at a gain creates a tax liability. In a tax-advantaged account trades are not taxed; in a taxable account they are.
An example with numbers
Take HAA Balanced and a portfolio of $10,000. In the backtest, this strategy has annual turnover of 347%: that means each year the equivalent of 3.5 times the portfolio is bought.
- Amount bought in a year: $34,691.
- With the cost used by the backtest (0.10% per trade, an approximation), that would be about $35 a year, that is, 0.35% of the portfolio.
It is an estimate on the backtest, not a promise. With a $3 minimum per order and four orders a month, the commission would be $144 a year: 1.44% of $10,000, much more than the backtest's assumption. With $50,000, that same $144 would be 0.29%. The size of the portfolio decides whether the strategy pays off.
How to reduce costs
- Use a rebalancing threshold. Ignore small differences from the target weight (for example, below 5% of the weight) and always apply it the same way.
- Prefer large, liquid ETFs, with a tight spread.
- Avoid trading at the open and close, when spreads are usually wider.
- Pick the trading currency that causes you the fewest conversions.
- Compare brokers with your own numbers, not a brochure's. Work out your orders with the rebalancing calculator.
When it does not pay off
If your portfolio is small and the broker charges a high minimum per order, costs may eat a good part of the strategy's edge. In that case you can:
- Follow a strategy with less turnover, such as a static portfolio rebalanced once a year.
- Use index funds, which in some countries allow switching without a tax event.
- Wait until you have more capital before rotating every month.
More context on whether it is worth it in the guide on tactical versus passive investing.
Frequently asked questions
Do the site's backtests include costs?
They include a simple transaction cost per trade (0.10%). They do not account for minimum commissions, currency or taxes, which depend on each investor. It is explained in the methodology.
Which cost should worry me most?
It depends on the size of the portfolio: with little capital, the minimum commission per order; with a lot, taxes on gains.
Are there brokers without commissions?
Some offer commission-free trades on a selection of ETFs or under certain conditions. Check which ETFs the list includes and whether yours is on it, because it changes often.
Are the ETF's costs (expense ratio) paid separately?
No. They are deducted continuously from the fund's value; they do not appear as a charge on your account.