Investors, be cautious when dealing with ETFs that have widened average spreads.

Spreads are a common occurrence in any exchange-traded security, which includes individual stocks and ETFs, between the buying “bid” price and the selling “ask” price.

Simply put, spreads represent a fee for trading. As the spread becomes bigger between the ask and bid prices, the more money is lost on each trade.

Three basic economic indicators show the impact of spreads on ETFs. More wealth or assets held, greater liquidity and diminished volatility all have a positive effect on ETFs, reports Matthew Hougan for Index Universe.

As the market becomes more volatile, the ETF spreads begin to rise. ETFs trading at an average spread of a nickel to a dime per share should be within acceptable ranges.

When liquidity is a factor, there is no market for some ETFs, so the bid and/or ask become stagnant. This could lead to artificially widened spreads, which takes money out of an investor’s pocket forcefully.

But, if you are the intrepid investor seeking ETFs with low levels of assets or light trading volumes, then do your homework and check the trading spreads. If you do test your money in these conditions, limit orders can offer better control over trades.

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.

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