Anonymous

27 Mar 2020

∙

How is no bids/ask spread beneficial to investors, as compared to a direct purchase of an ETF in the open market?

Can you explain more as how no bid/ask spread is beneficial to investors, as compared with directly purchase an ETF in the open market?
The fund managers still have to buy and sell the underlying in the open market, so net off will there be a difference? Or is there special arrangements?

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Shengshi Chiam, CFA

27 Mar 2020

Personal Finance Lead at Endowus

Bid ask spread is an implied cost that is incurred by the buyer and seller for the ETF, not the underlying securities. The more iliquid the ETF, the wider the spread, the higher the cost to the buyer and seller.

Let's say you have a bottle of wine. You think it is $14, but someone is only willing to pay $8. The both of you grudingly agree to transact at $12 eventually. The wider the spread, the greater the cost to both of you since you have to compromise more.

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