Why Trading Spreads Matter For ETFs

Expense ratios get all the attention, but spreads are another important ETF cost to consider.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

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

TickerFundAsset ClassSpread
SPYSPDR S&P 500 ETF TrustU.S. Equity0.0041%
QQQInvesco QQQ TrustU.S. Equity0.0068%
GLDSPDR Gold TrustCommodities0.0086%
IWMiShares Russell 2000 ETFU.S. Equity0.0087%
TLTiShares 20+ Year Treasury Bond ETFU.S. Fixed Income0.0087%
LQDiShares iBoxx USD Investment Grade Corporate Bond ETFU.S. Fixed Income0.0090%
SHViShares Short Treasury Bond ETFU.S. Fixed Income0.0091%
IEIiShares 3-7 Year Treasury Bond ETFU.S. Fixed Income0.0092%
TIPiShares TIPS Bond ETFU.S. Fixed Income0.0092%
MUBiShares National Muni Bond ETFU.S. Fixed Income0.0094%

 

ETFs With The Highest Spreads

TickerFundAsset ClassSpread
DDPDB Commodity Short ETNInverse51.95%
LDiPath Bloomberg Lead Subindex Total Return ETNCommodities51.89%
BOMDB Base Metals Double Short ETNInverse81.20%
AGFDB Agriculture Long ETNCommodities79.86%
FIEGDeutsche Bank FI Enhanced Global High Yield ETNLeveraged631.95%
BOSDB Base Metals Short ETNInverse58.35%
INRMarket Vectors-Indian Rupee/USD ETNCurrency100.07%
SZODB Crude Oil Short ETNInverse136.67%
URRMarket Vectors-Double Long Euro ETNLeveraged136.43%
BDDDB Base Metals Double Long ETNLeveraged158.76%

 

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.

 

 Average
Spread
Asset Weighted
Average Spread
Median
Spread
U.S. Equity0.24%0.03%0.16%
International Equity0.39%0.05%0.24%
U.S. Fixed Income0.17%0.02%0.14%
International Fixed Income0.30%0.06%0.24%
Commodities1.64%0.05%0.24%
Currency1.16%0.10%0.13%
Leveraged0.84%0.29%0.32%
Inverse1.78%0.10%0.21%
Asset Allocation0.38%0.21%0.29%
Alternatives0.56%0.18%0.38%
All ETFs:0.48%0.04%0.20%

 

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

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.