![IndexFunds.com Staff]( "IndexFunds.com Staff")
IndexFunds.com Staff
Another Look at ETF Premium/Discounts and Spreads
IndexFunds.com Staff
Wednesday, April 03, 2002
As we noted in a previous article, the liquidity of an exchange-traded fund is not always best measured by the historical trading volume of the fund. A better gauge of an ETF's liquidity is the liquidity of the underlying stocks in the index.
To quantify ETF liquidity, Salomon Smith Barney has conducted several "snapshot studies" that take random pictures of the ETF market to look at bid-ask spreads of domestic and international ETFs. Below are the results of the latest snapshot study conducted in January 2002, when Salomon Smith Barney gathered data from 40 random snapshots taken throughout the month.
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Domestic ETFs
|
| Average bid |
61,752 shares
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| Average ask |
66,799 shares
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| Average spread |
$0.18
|
| Average spread % |
0.330%
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| Cap-weighted avg. spread |
$0.06
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| Cap-weighted avg. spread % |
0.087%
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Source: Salomon Smith Barney, Bloomberg, the AMEX
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International ETFs
|
| Average bid |
13,487 shares
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| Average ask |
15,438 shares
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| Average spread |
$0.19
|
| Average spread % |
0.867%
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| Cap-weighted avg. spread |
$0.17
|
| Cap-weighted avg. spread % |
0.591%
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Source: Salomon Smith Barney, Bloomberg, the AMEX
Salomon also looked at premiums and discounts for the domestic and international ETFs. The tables below show that that the premiums and discounts for ETFs are very small. Not surprisingly, the international ETFs have larger premiums and discounts because the stocks are not as accessible.
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Domestic ETF Snapshot study - Premiums/Discounts
|
| |
Bid P/D
|
Mid P/D
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Ask P/D
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| Average |
-0.0937%
|
0.0067%
|
0.1069%
|
| Maximum |
1.4550%
|
1.6430%
|
3.5760%
|
| Minimum |
-1.2110%
|
-0.7010%
|
-0.5810%
|
| Cap-weighted avg. |
-0.0006%
|
-0.0028%
|
-0.0050%
|
Source: Salomon Smith Barney, Bloomberg
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International ETF Snapshot study - Premiums/Discounts
|
| |
Bid P/D
|
Mid P/D
|
Ask P/D
|
| Average |
-0.4753%
|
-0.0469%
|
0.3815%
|
| Maximum |
2.4603%
|
2.7778%
|
3.0952%
|
| Minimum |
-3.8961%
|
-3.3575%
|
-2.9520%
|
| Cap-weighted avg. |
-0.3066%
|
-0.0110%
|
0.2846%
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Source: Salomon Smith Barney, Bloomberg
The analysts who wrote the report noted that the results improve dramatically each time they conduct the snapshot study. They also said the growth in popularity of ETFs has helped shrink spreads, although the growth in the number of smaller funds has probably had an adverse affect on the overall results.
Additionally, a very competitive market was established in the Vanguard Total Stock Market Vipers (VTI). The managers of other broad-based competitor ETFs have countered by shrinking spreads in their own funds, according to Salomon Smith Barney.
Finally, the New York Stock Exchange is trading several AMEX-listed ETFs, and the addition of more specialists has created increased competition and helped reduce spreads even further.
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