The harsh truth of trading is this: Not every ETF can or will have a pennywide spread. But for large, well-traded ETFs, most investors expect trading costs to be relatively constrained—an expectation that is usually met.
For there are a few exceptions to this rule. A handful of large, well-traded ETFs—as in, more than $100 million in assets under management, trading more than $10 million in daily average volume—carry surprisingly high spreads. Understanding why is an exercise in due diligence, and a reminder that if a metric sounds too good to be true, it just might be.
Understanding ETF Spreads
An ETF's trading spread represents the difference between the price at which someone is willing to buy shares of the fund (the "bid") and that at which someone is willing to sell them (the "ask") (read: "Understanding Spreads & Volume").
For large, liquid ETFs, the difference between bid and ask is usually fairly small, because competition for trades on exchanges is so high. Everybody wants to trade these ETFs, so it's easy for authorized participants (APs) and individual investors to secure a favorable price.
For example, the SPDR S&P 500 ETF Trust (SPY) has a bid/ask spread of just 0.01%—effectively, a penny.
Generally speaking, spreads for more thinly traded ETFs tend to be higher. That's because the fewer trades that happen in a day, the less price competition occurs and the less pressure there is to keep bids close to asks. (That's not to say it's impossible to secure a good price on a thinly traded fund—just that it takes more work.)
Wide Spreads Widen
Spreads can widen, even in well-traded funds, for various reasons. If the underlying securities aren't trading well—or at all—then it can be harder for ETF traders to source competitive prices for their shares. Small-caps trade less frequently than large-caps, and international stocks trade over fewer market hours than domestic equities, and so on.
However, spreads can also widen if something fundamentally breaks down within an ETF's creation/redemption process. If an ETF has difficulty attracting enough APs to keep creation/redemption humming along smoothly, or if the ETF stops issuing new shares entirely, then spreads often widen on the secondary market—even if the ETF trades with brisk daily volume.
ETFs With Highest Spreads
The vast majority of these ETFs had spreads in the single percentage points. However, 10 ETFs had spreads higher than 0.10%:
|Large, Liquid ETFs With The Highest Spreads|
|Ticker||Fund||AUM ($M)||Avg Daily Dollar Volume ($M)||Spread|
|EELV||Invesco S&P Emerging Markets Low Volatility ETF||252||11.19||0.36%|
|MJ||ETFMG Alternative Harvest ETF||800||42.44||0.24%|
|PXF||Invesco FTSE RAFI Developed Markets ex-U.S. ETF||1,300||10.55||0.19%|
|EZA||iShares MSCI South Africa ETF||368||35.04||0.16%|
|CQQQ||Invesco China Technology ETF||410||10.75||0.15%|
|THD||iShares MSCI Thailand ETF||445||22.82||0.15%|
|EFG||iShares MSCI EAFE Growth ETF||3,520||17.06||0.12%|
|IXN||iShares Global Tech ETF||2,540||18.76||0.12%|
|BBCA||JPMorgan BetaBuilders Canada ETF||1,600||10.16||0.11%|
|ARKK||ARK Innovation ETF||1,210||15.59||0.11%|
|PSCH||Invesco S&P SmallCap Health Care ETF||1,150||24.37||0.11%|
Sources: FactSet, ETF.com; data as of Oct. 25, 2018
The three large, liquid ETFs with the highest spreads were the Invesco S&P Emerging Markets Low Volatility ETF (EELV), the ETFMG Alternative Harvest ETF (MJ) and the Invesco FTSE RAFI Developed Markets ex-U.S. ETF (PXF).
Two of these three funds have high spreads for similar reasons, while MJ has a different cause.