S&P 500 ETF spreads show why investors must consider total cost of ownership

Liquidity, tracking error and spreads all need considering

Theo Andrew

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State Street Global Advisor’s (SSGA) headline grabbing fee cut on its S&P 500 ETF may have piqued interest across the continent, but investors must look beyond low total expense ratios (TERs) when selecting ETFs.

On 1 November, the SPDR S&P 500 UCITS ETF (SPY5) slashed its fee from 0.09% to 0.03%, undercutting the market and creating the cheapest S&P 500 ETF in Europe.

Its closest rival, the synthetic Invesco S&P 500 UCITS ETF (SPXS) holds a TER of 0.05%, while the Vanguard S&P 500 UCITS ETF (VUSA) and the iShares Core S&P 500 UCITS ETF (CSPX) have TERs of 0.07%, respectively.

Despite this, fund selectors have been quick to point out the need to assess the total cost of ownership before switching based on the headline fee, these can include factors such as liquidity, tracking error and spreads.

Since the turn of the year, SPY5 has on average had wider bid/ask spreads than both CSPX and VUSA. For example, the average year-to-date spread for the London Stock Exchange (LSE) listed SPY5 was 3.6 basis points (bps) versus 1.8 bps and 2.5 bps for CSPX and VUSA, respectively, according to data from BMLL as of 7 February.

Simon McConnell, head of portfolio construction at Netwealth Investments, said the ongoing charges figure (OCF) is just one element investors need to consider, with the benefits of a low fee sometimes eroded by wider bid-ask spreads.

Wider spreads can happen for multiple reasons including product liquidity, larger ETFs will often trade with tighter spreads on exchange, McConnell noted.

Market makers also might have higher creation and redemption costs for different issuers, causing spreads to widen for certain providers.

SSGA said it recognises SPDR has wider spreads than BlackRock and Vanguard, but added SPY5 has a lower cost of ownership over a longer period, making it cheaper for the buy-and-hold investor.

Ben O’Dwyer, SPDR ETF global capital markets specialist at SSGA, said: “The difference in spreads is not that meaningful, across most exchanges the difference is only one or two basis points.

“Given the significant difference in TER of four bps, it takes very little time before an investor has a lower total cost of ownership from the SPDR product than either the Vanguard or iShares.

“An investor who chose the SPDR product over the iShares product would have made back the difference in spread in just 76 days and 122 days for the Vanguard product.”

Investors have since flocked to SPY5, which recorded $1.2bn inflows in the month after the cut and has since almost doubled its assets under management (AUM), topping $10bn in early February.

While it is worth noting the S&P 500 has risen 19.8% over the same period, it is clear investors have been lured in by the fee reduction.

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