DEFINITION of ‘Performance Drag’
The negative effect of transaction costs on the performance of an investment. Performance drag is most commonly attributed to brokerage commissions, but there are many other factors such as timing, bid-ask spreads and other opportunity costs that can cause the return of an investment to lag behind the return seen in the market.
BREAKING DOWN ‘Performance Drag’
For many traders, the actual return of an asset is sharply different than what would be recognized if all transaction costs were removed. For example, let’s assume an investor pays $30 in brokerage commissions (per order) to hold 100 shares of ABC Company at an entry price of $24 per share. In this case, the investor needs the stock’s price to rise 2.5% so that he or she can recover the commissions paid to be in the trade (a $0.60 rise on 100 shares will equal the $60 that the investor needs to recoup the commissions. Given the $24 stock price, this is equal to 2.5%) The 2.5% cost of the transaction will cause the investor’s position to drag behind the change in the price of the asset.