The Exchange-Traded Funds Manual, Second Edition

CHAPTER 8

How to Minimize Your Cost of Trading ETFs

There is a great deal of misinformation in circulation about the cost of trading ETFs and how to trade them efficiently. This chapter will help you evaluate the quality of ETF markets and keep your ETF share trading costs low.¹⁴⁷

ETF TRADING IS DIFFERENT FROM STOCK TRADING

A natural reaction by some investors to the title of this chapter may be “Why bother to write about trading ETFs when they trade ‘just like a stock’?” In fact, the principal reason for writing this chapter is that ETFs don’t trade like stocks. Only in a very superficial way does the intraday ETF market operate the same way the stock market operates. ETF markets behave differently from stock markets and ETF shares trade differently from stocks in a number of ways. Exhibit 8.1 lists some features that are responsible for similarities and differences between ETF and stock trading. To illustrate one difference, ETF investors have learned that ETF bids and offers in the intraday market usually change much more frequently than stock bids and offers. These frequent changes in ETF bids and offers can make ETF investors uneasy. Investors see changes in ETF bids and offers and they know they do not have as much information as professional traders have about what the ETF price should be or when and how the ETF bid or offer will change next.

This chapter will help investors find and stand on the level stretches of the ETF playing field where professional traders and ...