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Large, Liquid ETFs Can Have High Spreads


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Cinthia Murphy, Managing Editor, ETF.com

Sometimes large, liquid ETFs can have high trading spreads, something that may catch some ETF investors by surprise.

Trading spreads—the difference between bid and ask prices—is linked to competition for trades. The more a fund trades, the easier it is to get tight spreads and good prices, because there’s more pressure to keep bid and ask prices close. But that doesn’t mean highly liquid ETFs can’t face an occasional wide spread.

“Spreads can widen, even in well-traded funds, for various reasons,” ETF.com’s Lara Crigger reported. “If the underlying securities aren't trading well—or at all—then it can be harder for ETF traders to source competitive prices for their shares. Small-caps trade less frequently than large-caps, and international stocks trade over fewer market hours than domestic equities, and so on.”

“However, spreads can also widen if something fundamentally breaks down within an ETF's creation/redemption process. If an ETF has difficulty attracting enough APs to keep creation/redemption humming along smoothly, or if the ETF stops issuing new shares entirely, then spreads often widen on the secondary market—even if the ETF trades with brisk daily volume.”

A look at ETFs with at least $100 million in total assets and a minimum $10 million in average daily trading volume shows that several funds have pretty wide spreads:

Large, Liquid ETFs With The Highest Spreads

Ticker

Fund

AUM ($M)

Avg Daily Dollar Volume ($M)

Spread

EELV

Invesco S&P Emerging Markets Low Volatility ETF

252

11.19

0.36%

MJ

ETFMG Alternative Harvest ETF

800

42.44

0.24%

PXF

Invesco FTSE RAFI Developed Markets ex-U.S. ETF

1,300

10.55

0.19%

EZA

iShares MSCI South Africa ETF

368

35.04

0.16%

CQQQ

Invesco China Technology ETF

410

10.75

0.15%

THD

iShares MSCI Thailand ETF

445

22.82

0.15%

EFG

iShares MSCI EAFE Growth ETF

3,520

17.06

0.12%

IXN

iShares Global Tech ETF

2,540

18.76

0.12%

BBCA

JPMorgan BetaBuilders Canada ETF

1,600

10.16

0.11%

ARKK

ARK Innovation ETF

1,210

15.59

0.11%

PSCH

Invesco S&P SmallCap Health Care ETF

1,150

24.37

0.11%

Sources: FactSet, ETF.com; data as of Oct. 25, 2018

The takeaway for ETF investors is that high-volume ETFs can sometimes run into pretty wide spreads, something that makes trading these ETFs costlier. Trade even large, liquid funds with caution, and if the reason behind a wide spread isn’t clear, consider seeking help from a capital markets desk to source a trade.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , ETFs , ETPs



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