Why Trading Spreads Matter For ETFs

When it comes to holding an ETP, the expense ratio is all-important. When it comes to trading an ETP, another number matters more: the bid/ask spread.

The spread between the bid (the highest price a buyer is willing to pay), and the ask (the lowest price a seller is willing to accept), is a significant part of an ETP's trading cost. (Trading costs are reflected on ETF.com fund reports.)

As a general rule, ETPs with significant assets and trading volume tend to have smaller spreads than ETPs with minimal assets and light volume. For example, the $248 billion SPDR S&P 500 ETF Trust (SPY), the largest and most liquid ETP in the world, has an average spread of 0.004%—essentially zero. That’s great news for investors buying and selling the fund.

SPY’s tiny spread is certainly not the norm for ETPs. Data compiled by ETF.com shows that the average bid/ask spread for the more than 2,200 ETPs listed on U.S. exchanges is 0.48%.

How Statistics Are Skewered
The average is calculated by summing all ETP spreads and then dividing by the number of ETPs on the market.

A plethora of thinly traded products with little to no assets and large spreads—many of them ETNs—such as the DB Commodity Short ETN (DDP), the iPath Bloomberg Lead Subindex Total Return ETN (LD) and the DB Base Metals Double Short ETN (BOM), inflates the average.

That’s why some people prefer looking at the median ETP spread, which comes from lining up all the spreads from lowest to highest and taking the middle figure: 0.20%.

Another figure to consider is the asset-weighted average spread, which is calculated by giving more weight to bigger ETPs. It is only 0.04% for U.S.-listed ETPs, much lower than the regular average, since investors have most of their money in large, liquid products.

Those include the aforementioned SPY, as well as the Invesco QQQ Trust (QQQ), the SPDR Gold Trust (GLD) and the iShares Russell 2000 ETF (IWM), all of which have spreads of just under 0.01%.

ETFs With The Lowest Spreads

ETFs With The Highest Spreads

Spreads By Asset Class

As a group, U.S. fixed-income ETPs tend to have the lowest spreads. The average bid/ask spread for the group is 0.17%, while the median spread is 0.14%.

The next-cheapest groups are U.S. equity ETPs, international fixed-income ETPs, asset allocation ETPs and international equity ETPs, where average spreads range from 0.24% to 0.39%.

On the flip side, alternatives ETPs, leveraged ETPs, currency ETPs and commodity ETPs were areas where spreads tend to be relatively high—over 0.56% on average—suggesting investors should use caution when buying and selling those types of products.

Bottom Line

Spreads are an important factor in determining the total cost of trading an ETP. Investors should be mindful of an ETP's bid/ask spread when buying or selling. To find out the average spread for a particular ETP, visit the fund page for the ETP in question at www.etf.com/ticker.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2