Consequently, the tight bid-ask spreads in something like the SPDR S&P 500 ETF (NYSEArca: SPY) helps explain why large institutional investors keep returning to SPY to capture broad S&P 500 exposure when the iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO) both show cheaper expense ratios.
Over longer periods, holding costs will have a larger affect on total costs as the initial trading costs are amortized. Consequently, long-term investors are more apt to hold onto VOO or IVV, capitalizing on the ETFs’ cheaper expense ratios.
“Long-term investors should place more emphasis on holding costs, while traders should focus on trading costs and keep in mind that the most liquid ETP in a category can change over time, as long-term investors gravitate toward the most efficient ETP,” Rawson added.
Moreover, more long-term investors should keep in mind other holding costs, such as sampling errors, which entails comparing an ETF’s ability to track its underlying index. Ideally, an ETF would perfectly reflect its underlying benchmark, but ETFs may exhibit slight premiums or discounts to their net asset value, so investors should watch out for any glaring discrepancies.
For more information on ETFs, visit our ETF 101 category.
Full disclosure: Tom Lydon’s clients own shares of IVV, SPY.