Fund A has the lowest expense ratio. Fund B has a slight bid-ask spread advantage over the past 90 days, but it is condensed over the past 30 days, underscoring the need to look beyond one data point. The difference between the 30-and 90-day spreads also suggests the potential for a near-term trend forming, which requires a deeper look. The lower-cost fund, therefore, depends on the lookback period used, a major flaw of period-based analytics. Perhaps Fund A has the lower total cost. Perhaps not.
Reviewing just one period in time may not capture all of the different trading environments as market volatility and client demand can change over time. Average spread and volume data can be skewed depending on market and client dynamics during the time period being considered. There are days within those periods where spreads can be much higher or much lower. Therefore, it’s important to take a deeper dive into the data.
Because an ETF’s assets and trading volume can ebb and flow, we believe it’s helpful to focus on at least two years of data when conducting both market-based and fund-specific regime analysis. Too short of a time period may not allow for multiple market environments to be analyzed. With too long a period, analysis could be based on potentially stale data that may not reflect the current market environment and fund profile.
We evaluated Funds A and B from January 2018 through June 2019, a period that covered two market corrections and ensuing rallies, as well as multiple Federal Reserve (Fed) rate hikes and other macro-based events, such as tariff-driven US-China trade tensions. Next, we extended the analysis beyond simple averages and looked at maximum, minimum and median spread levels over the time period and bucketed the distributions in a histogram to identify the frequency of days with a specific bid-ask spread range.
As illustrated in Figure 2, Fund B has the lower bid-ask spread based on both the median and recent average figures. Fund B also has consistency, trading at less than a 0.03% spread on every single day within this period. Meanwhile, Fund A has had a more normal, but less consistent, distribution —with more than 134 days (34% of observations) having a spread greater than 0.07%. Because the minimum bid-ask spread over this period is similar to the more recent 30-day average, a deeper look is required to explore a potential recent trend that would not be noticeable if an investor looked only at a single data point.