Market Strains ETF Affordability

October 07, 2008 at 3:00 pm by Tom Lydon      Bookmark and Share

Exchange Traded Fund (ETF) InvestingThe recent strain on the market is pushing the limits for the affordability factor concerning exchange traded funds (ETFs).

ETFs are touted for their low cost and, in fact, it is a major selling point for most providers. The regulators’ latest restrictions on short-selling, mixed with the market stress, is making it more expensive to trade many ETFs, reports Ian Salisbury for The Wall Street Journal.

It appears the market strain is actually boosting the bid-ask spreads, which are the small markups investors pay to market makers whenever they buy or sell ETF shares. Single stocks also share these expenses, so it is affecting the products that buy and sell throughout the day, not open-ended mutual funds, which only close once at the end of the day.

Sadly, this is one way the stressed out market is reacting to September’s turbulence and the ETF as an ultra-efficient trading product is at stake. Bond ETFs have also had a hard time tracking their indexes, because of the confusion within the fixed income markets.

On average, spreads for ETFs have widened around 0.5% to up to 5% for a small handful. To some degree, the wider spreads just reflect wider spreads across the market. But the impact of these spreads upon investors is something to keep in mind.

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