Transactional Costs in Portfolio Rebalancing

ABC Wealth Management is managing a $500 million diversified equity portfolio for a high-net-worth client. As part of the annual rebalancing process, the portfolio manager identifies that the allocation to technology stocks has increased from 15% to 25% due to strong performance over the year, while the allocation to consumer staples has decreased from 20% to 10%. The target allocation for both sectors is 20%. The portfolio manager needs to rebalance the portfolio back to these target allocations.

In conducting the rebalance, the portfolio manager must consider the transaction costs associated with buying and selling securities, including market impact, bid-ask spreads, and commissions. Additionally, they must evaluate the timing of trades to minimize costs while ensuring that the rebalancing occurs in a timely manner to avoid unintended risks or exposures.

Discuss how the transaction costs associated with the rebalancing process can affect the performance of the portfolio. In your response, address the various components of transaction costs and strategies that the portfolio manager might employ to mitigate these costs while effectively rebalancing the portfolio.