0.1% is far from trivial. If you purchased SPY at the open and sold at the close today, you would have paid 0.1% of the open and 0.1% of the close, or 38% (back of the napkin math) of your profit on the trade in tax. And, that's in addition to any capital gains taxes you need to pay on the profit already.

You appear to be confusing creation/redemption with rebalancing. Creation/Redemption occurs at end of day when people enter and exit the fund. In the trivial example, suppose you're paying for a full unit of the fund (so 1 share of MSFT, 1 share of RHT, etc.) Then the fund manager will need to go and purchase 1 share of everything for you. Now there is also rebalancing, where the index being tracked changes. Suppose we have SPY. There were 20 instances throughout 2015 where the symbols in the S&P 500 were changed. Even if no one created or redeemed SPY, the fund manager would be subject to 40 transaction taxes simply to track the index (sell the old shares being replaced and buy the new one in the index).

SPY, for the record, has an expense ratio of 0.09%. How can State Street afford to manage the ETF for you in the face of this tax? Well to start, you will pay higher fees, which will lower your returns.

I also looked into the details of the tax [1]. It has horrifying economic ramifications:

* Up to 90% reduction in derivative transactions -- Markets are meant to move capital to people and firms who need it and risk from those who don't want it to those who want it. Derivatives are exceptionally important and reducing their use is a bad thing. For example, Apple needs to buy phones in one currency (Yuan) and sell them in another (USD). They face exchange rate risk, as the value of the two currencies fluctuate relative to one another. Apple can enter into a derivative to exchange their potential upside if the exchange rate fluctuates in its favor for a guaranteed exchange rate. Without these contracts, global commerce would be severely restricted.

* A long-run (20-year) reduction in gross domestic product -- this reduces levels of consumption across society, reducing tax income from other sectors and reducing employment, increasing the demand for government services. In other words, you are reducing the ability for the government to pay for services that it now will need to provide more of.

* An effective curb on automated high-frequency trading -- Why is this a good thing? HFT ensures greater liquidity in the market and simultaneously ensures that the prices of assets more accurately reflect their true value.

* An increase in capital costs, which could be mitigated by excluding primary markets for bonds and shares from the tax -- Increasing capital costs reduces economic growth, job opportunity, and R&D. The mitigation proposed is not as effective as one might think, as any purchaser in the primary market understands that the asset is less desirable in the secondary market to a purchaser as a result of the transaction tax there.

This tax is bad economic policy and will hurt everyone in the long run. However, it is a popular sentiment to want to punish financial institutions because they were bailed out. However, it's less popular to acknowledge that the government has made a substantial profit on those bailouts [2].

[1] https://en.wikipedia.org/wiki/European_Union_financial_trans...

[2] https://projects.propublica.org/bailout/