As providers fight over the ongoing price war in the race to see who can offer the cheapest exchange traded fund product, investors are jumping at the chance to cover broad markets at next to nothing prices. Still, you should not let cheap ETF fees blind you to other cost factors.
There are other factors to consider when calculating the overall cost of trading ETFs, writes John Wasik for Reuters. For instance, investors will have to take into account the bid/ask spread, underlying holdings, tracking error and commission fees.
Since ETFs are traded like stocks, investors will also have to look at the bid/ask spread, or the difference between the highest and lowest prices for buy and sell orders. As such, the tighter the spread, the better of the investor – wide spreads translates to a higher premium paid out, which adds to transaction costs. [Bid/Ask Spread]
ETFs track a basket of securities and the ETF will typically have a better bid/ask spread if the underlying assets include large- or mega-cap stocks. With thinly traded small-caps, international stocks or other niche areas, the spreads begin to widen.