Low trading costs: a gateway to supercharging diversification Low trading costs: a gateway to supercharging diversification Low trading costs: a gateway to supercharging diversification

Low trading costs: a gateway to supercharging diversification

Pricing 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  This article makes clear that Saxo’s reduction in trading costs can provide a gateway to inexpensively diversifying your portfolio. Adding diversity to a portfolio has long been considered a way to lower risk and improve the likelihood of positive portfolio growth over the longer-term. With lower trading costs, even investors just starting out can create diverse portfolios of multiple stocks, and add to or change these positions with minimal impact on returns.

The need to diversify investment portfolios is a long-established principle for investors to follow. A paper on portfolio diversification written in the 1950’s by economist Harry Markowitz, in fact, was awarded a Nobel Prize in 1990. As Markowitz said in interviews on the subject, “I was awarded [the prize] for portfolio theory, which in brief says: don’t put all of your eggs in one basket.” While diversification can never fully eliminate risk, it is important for any investor building a portfolio over a lifetime to avoid overexposure to any individual stock or sector. 

Especially for the investor just starting out on their investment journey, building a portfolio can seem a daunting task, and trading costs are a critical consideration. That’s particularly the case for smaller position sizes, where trading costs may represent a large percentage of the likely return on a portfolio – and as investment position sizes fall, fixed trading costs can severely downgrade portfolio returns.

New, lower Saxo trading costs are a gateway to supercharging portfolio diversification.

Just as active traders and investors will benefit from Saxo’s lower trading costs for more frequent trading strategies, so too will buy-and-hold investors. To illustrate the impact of Saxo’s lower costs, let’s take a buy-and-hold investor in Australia with a Saxo Classic account containing USD 10,000 (about AUD 15,000). This investor wants to invest in 10 US stocks with equally-sized positions of USD 1,000 each. Using Saxo’s old prices, the cost per trade would have been 0.08% of the amount of each position, or a minimum of USD 8. In this case, the minimum fee applies since 0.08% times USD 1,000 would be USD 0.80, far below the minimum USD 8 fee. 

If we multiply that minimum USD 8 commission times 10 positions, our investor would have paid USD 80 in commission costs, or 0.8% of the account value. But under the new commission structure, each position would incur a cost of 0.08% x the USD 1,000 position size or USD 1 minimum – in this case the USD 1 minimum applies. In other words, the trading costs have dropped 87.5%, totalling a mere USD 10 or 0.1% of the account value.

Let’s also say that, over an average year, this same investor has a 50% turnover rate in positions (five positions sold and five new positions acquired). Under the old cost structure, that would have meant an additional 0.8% of the account value in commission costs (USD 80 for five round trip trades, or 10 x USD 8).

Overall, with these assumptions of 20 total trades (see table below), our investor would have spent 1.6% of the account value. That 1.6% is a very significant chunk - over a fifth, in fact - of the average yearly S&P 500 Index return over the last 20 years of 7.5% (not including returns associated with dividends). Under the new pricing structure, the commissions would add up to only 0.2% of the account - less than 3% of the average return of the S&P 500.

Note: all examples in this article and in the table below only include trading costs, and do not include currency conversion costs.

Saving even more (in percentage terms) with regular position “top-ups”

If we further assume that this same investor wants to increase the size of five of their existing investment positions by USD 250 during the year, the old commissions associated with this USD 1,250 account size increase would have incurred another USD 40 in commission costs (5 new positions at USD 8 each). This would constitute a 3.2% commission cost relative to the size of the added funds. However, under the new costs, the USD 1,250 positions would incur a fee of only USD 1 each or USD 5 in total, or only 0.4% of the added funds. The smaller the position added, the more the new pricing impacts returns.

The examples above are based on prices available for Saxo’s Australian clients. The old trading costs before pricing changes may vary in other jurisdictions. Saxo clients trade according to Classic, Platinum or VIP pricing structures.


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