ETF Transaction Costs Are Often Higher Than Investors Realize

Exchange-traded funds( ETFs) and other exchange-traded products(ETPs) provide simple and efficient diversification and exposure to a wide range of investment asset classes. However, the apparently small bid–ask spreadsfor many ETFscan mask much higher transaction costs when ETF market pricesdeviate significantly from contemporaneous net asset values(NAVs). The deviations from NAV are often much greater than the bid–ask spreadssuggest. The authors report that ETFclosing prices are more than 90 basis pointsaway from the NAV approximately 10% of the time. Investors’ market-on-close (MOC) orders are likely to be executed at prices below the NAV.