[jjmaxwell4]

Yes we've thought about them a fair bit.

We believe that in most ETFs right now the transaction costs are largely factored into either the expense ratio or the ETF bid-ask spread, exactly due to the redemption mechanism you discussed. See section titled Spread of the Underlying Securities in an ETF Basket in the following PDF and the following quote:

"If a market maker has to obtain a portion of the ETF constituents on the secondary market to then deliver into the fund as part of the basket process, the cost of acquiring those names should be reflected in the ETFs bid/ask spread — as costs are traditionally passed through to the end customer."

https://www.ssga.com/library-content/pdfs/etf/au/spdr-au-etf...

Also we take estimated spread costs into account when running our portfolio optimization. A higher bid-ask spread as measured by past 1 month NBBO p50 spread generally gets penalized in our portfolio optimization all else being equal, although this depends slightly on what optimization setting you've chosen on Double.

[fairestvalue]

Except, in practice (not "traditionally"), the cost of a sophisticated market maker to acquire these constituents is usually much less than if you or I were to trade on the market in our brokerage account. SPY's spread is only 2 pennies wide (3 bps), for example.