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A Closer Look at the Total Cost of ETP Ownership (Part 2)

When looking for the lowest-cost exchange-traded product, it's important to take a holistic approach and mind the bid-ask spread.

Michael Rawson, CFA 03 August, 2015 | 15:21
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In part 1 of this article, we looked at how total costs of owning ETPs add up. In Part 2, we will look at some real life examples on some U.S. listed ETPs.

The Case of the S&P 500 ETFs
Differences in trading costs can help explain why one ETP is more popular than another, despite having higher holding costs. The best example of this is SPDR S&P 500 (SPY, listed in the U.S.). The exchange-traded fund tracks the S&P 500 and carries a 0.09% expense ratio. Since the inception of Vanguard S&P 500 ETF (VOO, listed in the U.S.) nearly five years ago, SPY has returned 16.95%, lagging the S&P 500 by 0.26 percentage points. This compares unfavorably with iShares Core S&P 500 (IVV, listed in the U.S.) (0.07% expense ratio) and VOO (0.05%), which returned 17.12% and 17.17%, respectively, during the same period. SPY has higher holding costs in part because of its unit investment trust structure.

Despite SPY's higher holding costs relative to IVV and VOO, SPY claims 63% of the total assets invested among the three funds. Though SPY has been less efficient at tracking its bogy, it trades an astounding US$24 billion a day, making it the most heavily traded security on the planet. The tremendous liquidity results in average bid-ask spreads of just one half of 1 basis point. That's tighter than any other ETP and amounts to just US$4 for a US$100,000 trade. For IVV, the average bid-ask spread over the 30 days through June 19 was 1 basis point, and it was 1.1 basis points for VOO.

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About Author

Michael Rawson, CFA  Michael Rawson, CFA is an ETF Analyst with Morningstar.

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