What is the total cost of owning an ETF?
Why Zerodha MF believes its liquid ETF is ideal for traders If an ETF isn't traded very often, the spread can widen because there aren’t many participants to keep the prices close together. Examples of these include ETFs with low AUM or sectoral ETFs. During times of volatility, spreads can widen as market makers try to protect themselves from rapid price movements.
According to a senior executive at a fund house, during the recent market volatility before and after election results, the ETF spreads were wide as market makers didn’t have enough capital to handle the high volumes during those two days. When you buy an ETF with a high spread, you’re paying a bit more than its market value. Similarly when you sell, you’re getting a bit less than the market value because you’re selling at the lower bid price.
This is an indirect cost you incur when you enter and exit an ETF. It’s not a fee you see directly, but it does affect your overall returns. Also read: It is still too early to invest in ‘smart beta’ ETFs Mutual funds are required to update the intraday net asset values (iNAVs) of ETFs on their websites every 15 seconds during market hours.
You can check whether the ETF is trading at a premium or at a discount to its iNAV when buying or selling it. To minimise the impact of the spread, try to trade ETFs during times of high liquidity and stable market conditions. Avoid trading in volatile markets unless necessary.
Understanding the spread and how it works can help you make more informed decisions and potentially save on costs when trading ETFs. As ETFs are traded on exchanges, you need a broker to execute trades. This means there is a brokerage cost involved as well.
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