Question

use yahoo finance and february 2020 as the ending date

3. One advisor charges commissions on any trades of $20 each way while the other charges a flat 2% fee per year. The investor believes he needs to buy and sell 30 stocks in any given year in order to be fully diversified. How much money does the investor need in order to be indifferent between using the two advisors? Given the investor can buy an exchange-traded portfolio such as a Diamond (DIA), Cube (QQQ), or Spider (SPY) in order to be well diversified with one trade which advisor does that favor? Explain why. Which one of those three portfolios had the best return since the beginning of the year? (use Yahoo Finance and Feb 20 as the ending date)

Answer 1

Under fixed fees structure, fees for 30 trades = 20 x 30 = 600

If M is the money the investor needs to be indifferent then,

M x 2% = 600

Hence, M = 600 / 2% =  30,000

------------------

With just one trade, the investor is better off with the first option i.e. fees of $ 20 per trade. He will achieve his end goal with just one transaction by paying just $ 20. A single transaction in exchange traded fund will be value intensive and a 2% fees will be a huge amount. Hence, the first option is better for the investor.

----------------------

ETF	As on 31st Dec 2019	As on 20th Feb 2020	Return
	V0	V1	V1/V0 - 1
DIA	285.10	292.78	2.69%
QQQ	212.61	234.78	10.43%
SPY	321.86	336.95	4.69%

All the values of V1 and V0 taken from Yahoo finance.

The highest return is in case of QQQ. It has definitely performed better than the other two. Hence, QQ had the best return since the beginning of the year.