ETF essentials · 2 minute read
Liquidity and spreads: what does it cost to trade an ETF?
The short answer
Liquidity describes how easily an ETF can be bought or sold. The spread is the difference between the price offered by someone buying and the price offered by someone selling.
Why it matters
When you buy an ETF, you normally pay the higher ask price. When you sell, you normally receive the lower bid price. The difference between them is the bid–ask spread.
A narrower spread usually means a lower immediate trading cost. Spreads can widen when markets are closed, unsettled or under stress.
An ETF’s exchange trading volume is not the whole picture. The liquidity of the underlying investments also matters. An ETF investing in a less-traded market may have wider spreads even if the ETF itself appears active.
A simple example
Suppose an ETF has a bid price of €99.90 and an ask price of €100.00. The spread is €0.10.
If you buy and immediately sell at those prices, the spread would work against you before considering commission or any market movement.
What to check
- How wide is the usual spread?
- Are the underlying investments easy to trade?
- Is the market open when you place the order?
- Would a limit order help you control the price?
- Could the spread widen during market stress?
Key term explained
Liquidity is the ability to buy or sell an investment without causing a large change in its price. The bid–ask spread is the difference between the buying and selling prices available in the market.
Trading volume is useful, but it should not be treated as a complete measure of an ETF’s liquidity.