ETF Spreads and Turnover
October 11th at 11:49am by Tom Lydon
Investing in exchange traded funds means more than doing the research on what ETF to buy, but also how to buy. Looking at the spread and volume can be important. Roger Nussbaum with Seeking Alpha reviews comments made by newsletter tracker Mark Hulbert. Hulbert claims that bid/ask spreads cause ETFs to underperform open ended funds and that trading ETFs more than five times in a year can be more costly than an expensive mutual fund.
Nussbaum gives his points in the article to show this is not necessarily true. I would add that you shouldn’t buy at market when there is a big spread and low volume. If you set a limit order that is reasonably between the two, often you’ll get it filled. Hulbert was assuming 500% turnover – who is going to have 500% turnover? Even 200% would be a lot, but with low commission rates today, cost will be very reasonable.
