Do ETF Bid-ask spreads matter?

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TheContrarian
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Do ETF Bid-ask spreads matter?

Post by TheContrarian »

I am currently looking for the best large-cap ETF (that's broader than the S&P 500) and have noticed that there are large differences in the bid-ask spreads of my favorites.

VTI (dominated by Large Caps)
Bid-ask spread: 0.19%
VV (Vanguard Large Cap)
Bid-ask spread: 0.76%
SCHX (Schwab Large Cap)
Bid-ask spread: 0.80%


I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?

Thank you so much!
- @isaachemingway
runninginvestor
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Re: Do ETF Bid-ask spreads matter?

Post by runninginvestor »

Where did you get those figures from?

I'm looking at etf.com for SCHX and it's significantly less
https://www.etf.com/SCHX

Same at Schwab's site:
https://www.schwabassetmanagement.com/products/schx

Those 3 funds are large enough that their spreads are typically 1 cent or so.

Generally though, yes, bid-ask spreads are slippage that you an think of as a small expense when trading. For these large, highly traded funds though, unless you are a high frequency trader it shouldn't be an issue.

edit:

i see Morningstar shows 0.8% for SCHX. They're likely showing after hours trades. I wouldn't rely on that figure until normal trading hours.
Last edited by runninginvestor on Sun May 28, 2023 1:15 pm, edited 1 time in total.
MrJedi
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Re: Do ETF Bid-ask spreads matter?

Post by MrJedi »

Look again during normal market hours.
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Re: Do ETF Bid-ask spreads matter?

Post by donaldfair71 »

MrJedi wrote: Sun May 28, 2023 12:17 pm Look again during normal market hours.
Yup.

The trading hour spreads will be a fraction of a fraction of what’s listed.
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Re: Do ETF Bid-ask spreads matter?

Post by grabiner »

If you are a buy-and-hold investor, the spread doesn't matter much because it is a one-time cost. For example, if you lose 0.2% to the spread on an ETF you hold for 10 years, that is equivalent to an extra 0.02% in annual expenses.
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Re: Do ETF Bid-ask spreads matter?

Post by livesoft »

isaachemingway wrote: Sun May 28, 2023 11:44 am I am currently looking for the best large-cap ETF (that's broader than the S&P 500) and have noticed that there are large differences in the bid-ask spreads of my favorites.

VTI (dominated by Large Caps)
Bid-ask spread: 0.19%
VV (Vanguard Large Cap)
Bid-ask spread: 0.76%
SCHX (Schwab Large Cap)
Bid-ask spread: 0.80%


I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?

Thank you so much!
- @isaachemingway
No, they don't matter unless trading after hours. Here's the Vanguard.com page on the recent median bid/ask spreads:
https://advisors.vanguard.com/investments/bidaskspread
The text "0.01%" is found 14 times when I looked.

Since reported spreads cannot be less than 0.01 in the US (otherwise there would be no spread), the ETFs with the highest prices like VTI will have the lowest spreads. SPTM will thus have a spread about 4 times higher (percentage-wise) than VTI. Of course, you should be able to get the other person to pay the complete spread.
I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?
This is only true for ETFs that you would not want to own.
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Re: Do ETF Bid-ask spreads matter?

Post by VoxActual »

Couldn’t the spread be a good thing sometimes? I could pick when I get in even as a buy and hold investor instead of buying at the NAV at the end of the day if the price were to go up?
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Re: Do ETF Bid-ask spreads matter?

Post by grabiner »

VoxActual wrote: Sun May 28, 2023 3:13 pm Couldn’t the spread be a good thing sometimes? I could pick when I get in even as a buy and hold investor instead of buying at the NAV at the end of the day if the price were to go up?
Welcome to the forum!

Trying to pick the right time of day to invest isn't a benefit, because you can't effectively time the market. If an ETF is trading at $50 in the morning and you buy it then, the ETF might close at $51, but it is just as likely to close at $49. You break even on average.

And the spread is a very small negative effect on top of this. If the ETF is trading at a spread of $49.98-$50.02 (a typical spread for a medium-volume ETF), it may have a fair value of $50, but you will buy at $50.02. The loss of 2 cents a share isn't a serious cost for a long-term investment; if you buy 1000 shares and the ETF doubles in value over ten years, your $50,020 might grow to $99,960 rather than the $100,040 you would get without the spread.
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Re: Do ETF Bid-ask spreads matter?

Post by HawkeyePierce »

VoxActual wrote: Sun May 28, 2023 3:13 pm Couldn’t the spread be a good thing sometimes? I could pick when I get in even as a buy and hold investor instead of buying at the NAV at the end of the day if the price were to go up?
In theory, yes. In practice, the big total market ETFs used by Bogleheads have since razor-thin spreads that it gets lost in the noise.
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Re: Do ETF Bid-ask spreads matter?

Post by livesoft »

grabiner wrote: Sun May 28, 2023 6:19 pm...
And the spread is a very small negative effect on top of this. If the ETF is trading at a spread of $49.98-$50.02 (a typical spread for a medium-volume ETF), it may have a fair value of $50, but you will [worst case, might*] buy at $50.02. The loss of 2 cents a share isn't a serious cost for a long-term investment; if you buy 1000 shares and the ETF doubles in value over ten years, your $50,020 might grow to $99,960 rather than the $100,040 you would get without the spread.
*I think the reality is that executions often happen at less than the ask price inside the published bid-ask range.
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Re: Do ETF Bid-ask spreads matter?

Post by TheContrarian »

runninginvestor wrote: Sun May 28, 2023 11:52 am Where did you get those figures from?

I'm looking at etf.com for SCHX and it's significantly less
https://www.etf.com/SCHX

Same at Schwab's site:
https://www.schwabassetmanagement.com/products/schx

Those 3 funds are large enough that their spreads are typically 1 cent or so.

Generally though, yes, bid-ask spreads are slippage that you an think of as a small expense when trading. For these large, highly traded funds though, unless you are a high frequency trader it shouldn't be an issue.

edit:

i see Morningstar shows 0.8% for SCHX. They're likely showing after hours trades. I wouldn't rely on that figure until normal trading hours.
I got them from Morningstar. Which site should I trust?
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Re: Do ETF Bid-ask spreads matter?

Post by donaldfair71 »

isaachemingway wrote: Mon May 29, 2023 8:04 am
runninginvestor wrote: Sun May 28, 2023 11:52 am Where did you get those figures from?

I'm looking at etf.com for SCHX and it's significantly less
https://www.etf.com/SCHX

Same at Schwab's site:
https://www.schwabassetmanagement.com/products/schx

Those 3 funds are large enough that their spreads are typically 1 cent or so.

Generally though, yes, bid-ask spreads are slippage that you an think of as a small expense when trading. For these large, highly traded funds though, unless you are a high frequency trader it shouldn't be an issue.

edit:

i see Morningstar shows 0.8% for SCHX. They're likely showing after hours trades. I wouldn't rely on that figure until normal trading hours.
I got them from Morningstar. Which site should I trust?
As I would think that most ETF buying is done during trading hours, the median bid/ask is probably a decent approximation.

https://advisors.vanguard.com/investments/bidaskspread
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Re: Do ETF Bid-ask spreads matter?

Post by grabiner »

donaldfair71 wrote: Mon May 29, 2023 8:16 am
isaachemingway wrote: Mon May 29, 2023 8:04 am I got them from Morningstar. Which site should I trust?
As I would think that most ETF buying is done during trading hours, the median bid/ask is probably a decent approximation.

https://advisors.vanguard.com/investments/bidaskspread
ETF.com also shows historical spreads.
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Re: Do ETF Bid-ask spreads matter?

Post by runninginvestor »

donaldfair71 wrote: Mon May 29, 2023 8:16 am
isaachemingway wrote: Mon May 29, 2023 8:04 am
runninginvestor wrote: Sun May 28, 2023 11:52 am Where did you get those figures from?

I'm looking at etf.com for SCHX and it's significantly less
https://www.etf.com/SCHX

Same at Schwab's site:
https://www.schwabassetmanagement.com/products/schx

Those 3 funds are large enough that their spreads are typically 1 cent or so.

Generally though, yes, bid-ask spreads are slippage that you an think of as a small expense when trading. For these large, highly traded funds though, unless you are a high frequency trader it shouldn't be an issue.

edit:

i see Morningstar shows 0.8% for SCHX. They're likely showing after hours trades. I wouldn't rely on that figure until normal trading hours.
I got them from Morningstar. Which site should I trust?
As I would think that most ETF buying is done during trading hours, the median bid/ask is probably a decent approximation.

https://advisors.vanguard.com/investments/bidaskspread
Yes, you probably could rely on Morningstar during normal trading hours. What's happening with them is they are likely showing the bid/ask spread fof aftermarket trading which is generally higher since it's not as liquid. It looks like they last refreshed their data after hours which makes sense.

ETF.com, under Tradability, shows a chart for the daily spreads and then lists the average and other statistics in a table after the chart. The previous link for the Schwab fund gives an example.
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Re: Do ETF Bid-ask spreads matter?

Post by Katietsu »

Look at the Morningstar site and I think you will see that the data is from May 26 at 7:59 PM, 4 hours after the close of regular trading hours.
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Re: Do ETF Bid-ask spreads matter?

Post by Wwwdotcom »

yes, they matter, but I would also look at volume before drawing any overall conclusions.

If an etf has a large spread, its likely the spread will be larger during a market turmoil... its also a fund that is more likely to cease to exist in the future than a low spread high volume etf.
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Re: Do ETF Bid-ask spreads matter?

Post by AnEngineer »

Until it at least rivals the day to day price fluctuations, I don't see how it can make a material impact. The price difference between what you expect when you place a mutual fund order and the NAV you get is probably more and it's not mentioned as a cost.

You'd rather spend $100 a share when there's a $1 bid/ask spread than $110 when the spread is $0.01 (numbers are just meant to illustrate).
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Re: Do ETF Bid-ask spreads matter?

Post by TheContrarian »

livesoft wrote: Sun May 28, 2023 1:42 pm
isaachemingway wrote: Sun May 28, 2023 11:44 am I am currently looking for the best large-cap ETF (that's broader than the S&P 500) and have noticed that there are large differences in the bid-ask spreads of my favorites.

VTI (dominated by Large Caps)
Bid-ask spread: 0.19%
VV (Vanguard Large Cap)
Bid-ask spread: 0.76%
SCHX (Schwab Large Cap)
Bid-ask spread: 0.80%


I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?

Thank you so much!
- @isaachemingway
No, they don't matter unless trading after hours. Here's the Vanguard.com page on the recent median bid/ask spreads:
https://advisors.vanguard.com/investments/bidaskspread
The text "0.01%" is found 14 times when I looked.

Since reported spreads cannot be less than 0.01 in the US (otherwise there would be no spread), the ETFs with the highest prices like VTI will have the lowest spreads. SPTM will thus have a spread about 4 times higher (percentage-wise) than VTI. Of course, you should be able to get the other person to pay the complete spread.
I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?
This is only true for ETFs that you would not want to own.
Great point about the share price and how it affects bid-ask spreads!
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Re: Do ETF Bid-ask spreads matter?

Post by secondopinion »

livesoft wrote: Sun May 28, 2023 1:42 pm
isaachemingway wrote: Sun May 28, 2023 11:44 am ]I've heard from various sources that an ETF's bid-ask spread should be counted as an expense (like a front-end load) and should be considered when choosing an ETF. Is that true?
This is only true for ETFs that you would not want to own.
I have some ETFs with wider spreads but a comparatively much lower ER than the liquid equivalents. It really depends on just how much liquidity is needed and how esoteric the portfolio is; I do not need liquidity that much, so it is better to save it in the ER (given that is bid-ask spread versus ER) for anything that is not plain vanilla.
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Re: Do ETF Bid-ask spreads matter?

Post by Charles Joseph »

the wider the spread, the more it matters.
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Re: Do ETF Bid-ask spreads matter?

Post by gavinsiu »

So for mutual funds, you get the price at the end of the day.

For ETF, it's more like stock so the price could change constantly through out the day. Is there a any tips on buying ETF. Could I for example setup a price limit so that I don't accidently buy the ETF if the price happen to get a short large spike during purchase?
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Re: Do ETF Bid-ask spreads matter?

Post by Wiggums »

gavinsiu wrote: Thu Jun 29, 2023 7:46 am So for mutual funds, you get the price at the end of the day.

For ETF, it's more like stock so the price could change constantly through out the day. Is there a any tips on buying ETF. Could I for example setup a price limit so that I don't accidently buy the ETF if the price happen to get a short large spike during purchase?
You can set a ETF purchase price or place a market order. With a heavily traded ETF, saving a few pennies does not matter to me - a buy and hold investor.
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Re: Do ETF Bid-ask spreads matter?

Post by gavinsiu »

Wiggums wrote: Thu Jun 29, 2023 7:59 am You can set a ETF purchase price or place a market order. With a heavily traded ETF, saving a few pennies does not matter to me - a buy and hold investor.
I was concern that there would be a spike of say 60% when I purchased. I have not purchased any stock ever, so is not familar with the process.
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Re: Do ETF Bid-ask spreads matter?

Post by JoMoney »

I've taken to like making "Market On Close" orders for the ETF's I'm transacting in. I don't know what price it's going to execute at, but I like knowing that it's going to be at the well publicized market close price, and it's the same execution price for both buy and sell orders effectively no bid/ask spread (although for an ETF a positive or negative spread to NAV may exist.) I did this last week, there were two ETF's that I wanted to hold the equity portion in my Roth IRA and to up my cash/fixed income in Traditional IRA. I placed a buy MoC order in the Roth, and a MoC sell in the traditional IRA for the same ETF(s), and got the same execution price on both. I wish Fidelity would make transacting by $ amount (rather than by shares) available for MoC orders. FWIW, one of my ETFs traded at a slight discount to NAV and the other at a slight premium to NAV, in another thread someone claimed that there is some higher likelihood for it to transact at a premium, but I think that's always the case for ETFs, and since MoC executes at the same price regardless of which direction it's going (buy or sell) any potential advantage one way would seem to be made up on the round-trip.
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Re: Do ETF Bid-ask spreads matter?

Post by sycamore »

gavinsiu wrote: Thu Jun 29, 2023 8:02 am
Wiggums wrote: Thu Jun 29, 2023 7:59 am You can set a ETF purchase price or place a market order. With a heavily traded ETF, saving a few pennies does not matter to me - a buy and hold investor.
I was concern that there would be a spike of say 60% when I purchased. I have not purchased any stock ever, so is not familar with the process.
60% spike on a broad-market ETF would be rather incredible. That hasn't happened.

It could happen with a single stock that had some incredible news during the day. But you're talking about an S&P 500 fund or Total Stock Market fund, yes? I wouldn't worry about huge spikes like that on a single day.

But even a spike of 5%. For sure that could happen. But remember that such spikes could happen and hurt you with mutual funds, e.g., you buy a mutual fund that's priced at the NAV on day 1, but on day 2 some news comes out and the price spikes down and now your fund has lost value.

Are you concerned about certain kinds of spikes that only happen intra-day? Or maybe about temporary up-and-then-back-down spikes? Perhaps as a result of weird trading going on that you don't understand, e.g., flash crash or some such incident you hear in the news? I can see how someone might be worried about that. As others have mentioned, using a "limit" order or a "marketable limit" order can help you avoid those.
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Re: Do ETF Bid-ask spreads matter?

Post by gavinsiu »

sycamore wrote: Thu Jun 29, 2023 8:36 am 60% spike on a broad-market ETF would be rather incredible. That hasn't happened.

It could happen with a single stock that had some incredible news during the day. But you're talking about an S&P 500 fund or Total Stock Market fund, yes? I wouldn't worry about huge spikes like that on a single day.

But even a spike of 5%. For sure that could happen. But remember that such spikes could happen and hurt you with mutual funds, e.g., you buy a mutual fund that's priced at the NAV on day 1, but on day 2 some news comes out and the price spikes down and now your fund has lost value.

Are you concerned about certain kinds of spikes that only happen intra-day? Or maybe about temporary up-and-then-back-down spikes? Perhaps as a result of weird trading going on that you don't understand, e.g., flash crash or some such incident you hear in the news? I can see how someone might be worried about that. As others have mentioned, using a "limit" order or a "marketable limit" order can help you avoid those.
I guess I was concern that intra-day volatility would be greater than day to day volatility that would be typical of a mutual fund. I was under the impression that day to day was an average of the day, but I might be wrong.
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Re: Do ETF Bid-ask spreads matter?

Post by grabiner »

gavinsiu wrote: Thu Jun 29, 2023 9:14 am I guess I was concern that intra-day volatility would be greater than day to day volatility that would be typical of a mutual fund. I was under the impression that day to day was an average of the day, but I might be wrong.
Mutual fund prices are based on the closing price, so a purchase of an ETF at the market close should get you just about the same price as a mutual fund.

Also, small amounts of volatility don't really matter. If you buy an ETF in the morning, it could drop 2% during the day, but it is just as likely to gain 2% during the date; you'll break even on average. And whoever sold you that ETF has the opposite effect, as they missed out on either a loss or a gain.
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Re: Do ETF Bid-ask spreads matter?

Post by Jack56 »

Spreads are costs and like any cost they should be minimized. If you are buying something with a large spread, say more than a couple of pennies you probably shouldn't be buying it.
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Re: Do ETF Bid-ask spreads matter?

Post by grabiner »

Jack56 wrote: Sun Jul 02, 2023 10:54 am Spreads are costs and like any cost they should be minimized. If you are buying something with a large spread, say more than a couple of pennies you probably shouldn't be buying it.
The difference is that spreads are a one-time cost, so the cost is amortized over time if you are a buy-and-hold investor. If you buy an ETF with a 0.20% spread at the ask, and sell it 10 years later at the bid, that is equivalent to an extra 0.02% in annual expenses.
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