Additionally, since ETFs are traded throughout the trading day, traders should also watch the bid/ask spread. While two ETFs may have a bid/ask spread of one penny, ETFs trade at different prices so a low-priced ETF with a one penny spread will cost more than high-priced securities. Consequently, Hoffstein suggests investors to convert the spread into basis points since it provides a better represents of the overall percentage of an ETF’s price.
Lastly, efficiency or the ability of an ETF to closely track its index can also affect the returns. When buying or selling an ETF, an investor will be exposed to the changes in an ETF’s premium or discount to its net asset value. A wider price dispersion from the NAV could diminish returns over time. [The Various Costs of Trading ETFs]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.