As you get acquainted with exchange traded funds (ETFs), one of the first characteristics of an ETF you’ve noticed is that they are traded like stocks. Like stocks, the price of an ETF changes throughout the day, and determining when you buy and the price at which you buy will in large part be determined by the bid-ask.
What It Is
The spread, or the difference between the bid and ask price of the security, is determined by the basic fundamentals of supply and demand. More buyers means more bids, and more sellers means more asks.
At times, the bid and ask prices equalize, but only for a brief window. All other times, the ask usually exceeds the bid. Hence, the name bid-ask spread.
Highly liquid ETFs tend to have bid-ask spreads of just pennies while more thinly traded ETFs may experience greater disparities. This might pose as one of those hidden costs attributed to trading in ETFs and eat away at potential returns.
The New York Stock Exchange and the Nasdaq match buyers and sellers electronically, but there are some specialists who may also post bids or offers that are slightly narrower than that of the market to maintain a smoother market.