Fees Eat Diversification's Lunch

ABSTRACT: Diversification is often spoken of as the only free lunch in investing, yet we show that it is not free and is properly considered only in light of its costs. More-exotic asset classes typically come with a higher price tag. We show that fees on diversifying asset classes are high relative to their risk-adjusted diversification benefit. Because there is meaningful cross-sectional variation, fees need to be part of asset mix decisions and strategic asset allocation.

This paper was made available on SSRN as of 28 December 2014.
This paper was presented at the Midwestern Finance Association March 2015 meetings in Chicago.
The paper was accepted at the Financial Analysts Journal on 7 July 2015.
The paper was published in the March/April 2016 issue of the Financial Analysts Journal. The published version is here.
© William W. Jennings 1999-2016