When you invest in an exchange traded fund (ETF), you want to pay attention to the "bid-ask" spreads. These are the premiums that you pay every time you buy or sell. With time and some work it is possible to keep these spreads to a minimum, reports Ian Salisbury for The Wall Street Journal. Remember, ETFs are structured like a mutual fund, yet trade on an exchange like a stock, so there are management fees like a traditional mutual fund, and there are brokerage commissions and spreads, like a single stock. These expenses don’t make ETFs expensive, in fact, they are less expensive than traditional funds. Here are tips to keeping the spreads as small as possible:
- Gauge the spread.
Widely-traded large-company ETFs tend to have thinner spreads than those more thinly-traded small-company stocks. For example, the SPDRs (SPY) has an average spread of one cent or 0.1%. On the flip side, Market Vectors Global Alternative Energy ETF (GEX) has an average spread of 21 cents or 0.5% of its share price. - Use trading techniques.
Investors can limit ETF spreads by placing a limit order. In this type of trade, investors offer to buy or sell shares at a set price, not at the only available price at the time of the trade. However, if not many people are willing to trade on those terms, the order might sit a long time. - Avoid trading early
Experienced traders know not to trade as soon as the market opens at 9:30 a.m. Eastern time. Market makers have a hard time pricing ETFs during the first few minutes of the trading day, so spreads can be wider for the first five to 10 minutes of the day.
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.