Exchange traded funds (ETFs) using active management are different from regular indexed funds in that the expenses add up differently. Is the bid-ask spread an issue for investors seeking these funds?
There are several parts to the total expenses involved in owning actively managed ETFs. The most obvious, of course, is the ETF expense ratio. Shishir Nigam for Active ETFs reports that there are two main drivers in the expenses of these funds:
- An explicit component of costs is the commission on trades, which can vary from broker to broker.
- Some of the less visible or implicit costs when you trade active ETFs include the premium/discount of the ETF price to NAV.
The bid-ask spread is also a drag on the expense of actively managed ETFs. The bid-ask spread depends a lot on several things that all play off the amount of interest there is in the funds from investors. [5 Ways to Cut the Cost of Investing.]
If an ETF has an overly-wide spread, then market makers can create or redeem ETF shares directly from the ETF manager to meet orders and capture a small profit. [Understanding the Bid-Ask Spread.]
Even if actively-managed ETFs have a large asset base, it may not have large trading volumes. That’s because active ETFs are intended to be long-term investments, just like active mutual funds, and not as short-term trading vehicles.
Tisha Guerrero contributed to this article.
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