The latest market swing has uncovered a caution to consider when investing in exchange traded funds (ETFs). It appears that wide trading spreads are a problem because ETFs trade on exchanges like stocks. "Bid-ask" spreads are the gaps between the price buyers are willing to pay and sellers are willing to accept. A wide spread can take away from an investment, and they are an unanticipated cost.
The popular, widely traded ETFs haven’t been susceptible but the specialty, niche products have. Diya Gullapalli for The Wall Street Journal explains that just as spreads on regular stocks vary, they do so with ETFs as well. Investors, of course, want the smallest spreads possible. But if you happen to be selling, and it’s on a day the market is deteriorating, you have to choose between accepting the bigger spread, or risking a bigger loss by sitting on the sidelines. The issue could worsen as hundreds of new ETFs are in the pipeline. Many will focus on narrow market niches, so beware. Low trading activity can contribute to wider spreads too.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.