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With So Many ETFs Now Free To Trade, Liquidity And Trading Costs Still Need To Be Evaluated

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With So Many ETFs Now Free To Trade, Liquidity And Trading Costs Still Need To Be Evaluated

Last week, several online brokers like Charles Schwab (NYSE: SCHW) and TD Ameritrade (NASDAQ: AMTD) made waves by eliminating commissions on options, individual stocks and exchange traded funds.

In other words, gone are the days of talking about brokers' various commission-free ETF offerings because, well, now they're all free.

What Happened

Some ETF issuers believe further democratization of investing — and that's exactly what eliminating commissions is — could increase liquidity for some ETFs. When it comes to ETFs, expense ratios, which have been broadly decreasing, are only part of the total cost of ownership equation.

“Trading costs are an important factor to consider,” said State Street, the company behind the SPDR ETFs. “ETFs with high trading volumes tend to have tight bid-ask spreads that can reduce trading costs and lower your total cost of ownership (TCO).”

See Also: How And Why Are Online Brokers Offering Commission-Free Trades?

Why It's Important

Previously, many high profile, highly liquid ETFs were not part of commission-free platforms. In the case of SPDR funds, the SPDR S&P 500 ETF (NYSE: SPY) and the SPDR Gold Shares (NYSE: GLD), just to name a pair, weren't part of commission-free platforms because brokers didn't want to lose revenue from those heavily traded funds.

State Street compared liquidity in SPDR ETFs trading on Schwab's and TD Ameritrade's commission-free ETF platforms prior to the outright elimination of commissions on all ETFs. The findings were interesting, if not unsurprising.

“It is significant that the total average daily trading volume for our funds that previously did not trade commission-free is $35.4 billion versus less than $1 billion for the commission free-style funds,” said the issuer.

What's Next

Although commissions are out the door and that's good for investors, ETF users still need to assess factors such as bid/ask spreads and the dept of the underlying market, be it gold for a fund like GLD or technology stocks for a fund such as the Technology Select Sector SPDR (NYSE: XLK).

“Just because commissions have dropped across major platforms this doesn’t mean you should throw trading cost considerations or liquidity due diligence by the wayside,” according to State Street.

“You still need to evaluate bid-ask spreads and depth of market. Depending on your rebalancing size and frequency, these trading costs can accumulate significantly and have a larger impact on the TCO than any expense ratio difference between two ETFs.”

Posted-In: State StreetNews Sector ETFs Broad U.S. Equity ETFs Specialty ETFs Top Stories ETFs Best of Benzinga

 

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