Why Trading Spreads Matter For ETFs

Senior ETF Analyst

Jan 30, 2019

Reviewed by: Sumit Roy

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

Ticker	Fund	Asset Class	Spread
SPY	SPDR S&P 500 ETF Trust	U.S. Equity	0.0041%
QQQ	Invesco QQQ Trust	U.S. Equity	0.0068%
GLD	SPDR Gold Trust	Commodities	0.0086%
IWM	iShares Russell 2000 ETF	U.S. Equity	0.0087%
TLT	iShares 20+ Year Treasury Bond ETF	U.S. Fixed Income	0.0087%
LQD	iShares iBoxx USD Investment Grade Corporate Bond ETF	U.S. Fixed Income	0.0090%
SHV	iShares Short Treasury Bond ETF	U.S. Fixed Income	0.0091%
IEI	iShares 3-7 Year Treasury Bond ETF	U.S. Fixed Income	0.0092%
TIP	iShares TIPS Bond ETF	U.S. Fixed Income	0.0092%
MUB	iShares National Muni Bond ETF	U.S. Fixed Income	0.0094%

ETFs With The Highest Spreads

Ticker	Fund	Asset Class	Spread
DDP	DB Commodity Short ETN	Inverse	51.95%
LD	iPath Bloomberg Lead Subindex Total Return ETN	Commodities	51.89%
BOM	DB Base Metals Double Short ETN	Inverse	81.20%
AGF	DB Agriculture Long ETN	Commodities	79.86%
FIEG	Deutsche Bank FI Enhanced Global High Yield ETN	Leveraged	631.95%
BOS	DB Base Metals Short ETN	Inverse	58.35%
INR	Market Vectors-Indian Rupee/USD ETN	Currency	100.07%
SZO	DB Crude Oil Short ETN	Inverse	136.67%
URR	Market Vectors-Double Long Euro ETN	Leveraged	136.43%
BDD	DB Base Metals Double Long ETN	Leveraged	158.76%

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. Equity	0.24%	0.03%	0.16%
International Equity	0.39%	0.05%	0.24%
U.S. Fixed Income	0.17%	0.02%	0.14%
International Fixed Income	0.30%	0.06%	0.24%
Commodities	1.64%	0.05%	0.24%
Currency	1.16%	0.10%	0.13%
Leveraged	0.84%	0.29%	0.32%
Inverse	1.78%	0.10%	0.21%
Asset Allocation	0.38%	0.21%	0.29%
Alternatives	0.56%	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

| Contact: [email protected]

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.

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Why Trading Spreads Matter For ETFs

Why Trading Spreads Matter For ETFs

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