ETF spreads explained

This Best ETFs tutorial explains how ETF spreads work, why ETF spreads are important and how to minimise the risk of overpaying for an ETF based on its spreads. Please watch our video, below, for a full explanation.

If you’ve ever wondered how ETF investing can go wrong, just ask someone who ‘trades’ ETFs.

According to our ETF data on Best ETFs Australia, our free website which analyses and provides coverage of every ETF currently available in Australia, the average buy-sell spreads on ETFs during July 2021 was 0.22%.

The buy-sell spread is the invisible cost of investing in a managed fund, mFund or ETF. It’s paid each time an investor enters or exits a fund and covers the costs incurred by the market maker or fund provider.

The following Rask Education video, part of our free ETF Investors online course, explains how ETFs work in detail.

ETFs are not for trading

Here’s where the spread conversation gets interesting…

In March 2020, a month of significant volatility on the ASX and global financial markets, the average buy-sell spread for Australian ETFs was an incredible 0.85%! Keep in mind, these vehicles are supposed to be investing in the most liquid asset classes.

By far, the worst sector was commodities, with an average buy-sell spread of 1.46% — for an asset class that doesn’t pay any dividends/distributions, it’s even more important to be choosey.

The three best ASX commodities ETFs, in terms of buy-sell spreads during July 2021, were as follows:

  1. GOLD ETF by ETF Securities – 0.04%
  2. PMGOLD ETF by Perth Mint – 0.10%
  3. QAU ETF by BetaShares – 0.10%

The worst commodities ETF based on buy-sell spreads, ETPMPD, had a buy-sell spread of 0.43%.

One thing to note is that the average ETF spread, at 0.21%, is a sizeable chunk relative to the average management expense ratio (MER) of 0.54%.

In other words, if you traded (buy or sell) an average commodities ETF 3x per year, you will lose more in buy-sell spreads than you do in fees. 

Size matters

At Best ETFs Australia, typically, our baseline rule of thumb is to draw a line in the sand at $100 million of funds under management (FUM) before an ETF receives our highest rating. However, this is just a rule of thumb and most ETF providers and their market makers are better now.

If we slice and dice the ASX list of ETFs to include only those ETFs with $100 million invested, the average spread on ETFs falls (gets better). Meaningfully.

While we acknowledge it’s a crude way to cut up the data, the next time you feel the need to rebalance or invest in ETFs during heightened market uncertainty — remember to narrow your range to focus only on proven ETFs with tight buy-sell spreads.

Search the full list of ASX ETFs and access free reports to find your next investment.

General Financial Advice warning
The information on this website is general financial advice only. That means, the advice does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. Please read our Terms & Conditions and Financial Services Guide before using this website.

© Rask Australia 2020

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