Spreads are important for ETF investors. The spread is a component of the total cost of holding each fund. It (along with the cost of brokerage) is the cost of getting in and out of ETF's. It is also the confidence that when you need to exit quickly, you can do so at a fair price.
The trading spread is the % difference between the price at which you can buy and the price at which you can sell. It is in fact the margin made by the market makers in the ETF's.
For instance the AAA cash fund ETF has an average spread over the last 6 months of 0.02% , the STW ASX 200 fund has an average of 0.04% over that period. For the whole market, thats every ETF, the average is 0.27%.
Looking at the other end some ETF's are expensive. The K2 small caps ETF, KSM, has an average spread of 1.47% making it the most expensive ETF to trade.
There are some reasons why an ETF trades at a higher than average spread. The market maker is buying and selling the ETF's based on their ability to create and redeem those ETF's. So a market maker selling you STW for instance needs to go into the market and sell the top 200 shares in the market. That is not so difficult to do so the amount they charge to do it is small, but if you are buying a small cap fund the market maker need to sell a basket of small, possibly illiquid, shares and that can be difficult. So some larger spread is justified. The same could be the case for global shares.
So we like to see low spreads, now, plus a history of low spreads, and a history of low spreads even when markets are very volatile.
There are 5 charts in this series starting with average spreads in each sector. Vanguard wins 3 of the 4 and really amongst the major players it's 4 out of 4.
Have a look at the last 3 charts in the series. Vanguard also has the lowest spreads in March 2020 for Australian Shares and Fixed Income, but not for Global Shares. March 2020 is our proxy for 'when things get tough'. The award for lowest global Shares spread in March 2020 went to Blackrock.
One final point is that some of this data may not be like for like. Some ETF issuers have a more vanilla portfolio of funds and that leads to lower spreads. So if we look at the blow out rather than the absolute number it is fairer. The following is the difference between the March 2020 spread and the April 2021 spread divided by the April 2021 spread. Blackrock on top followed closely by BetaShares.
Vanguard 3.94x
Blackrock 2.73x
VanEck 5.2x
iShares 3.04x
ETF Securities 4.05x
BetaShares 2.8x
