Understanding ETF Bid-Ask Spreads
The bid-ask spread is a hidden cost every time you buy or sell an ETF. Here is how it works and how to keep it small.
Don't have time? Here's what you need to know:
- 1The bid-ask spread is a hidden transaction cost — $0.01 on VOO, up to $0.50 on illiquid ETFs
- 2For liquid ETFs (VTI, VOO, SPY), spread costs are negligible for buy-and-hold investors
- 3Use limit orders for any ETF with a spread above $0.05
- 4Trade during midday (10 AM - 3 PM ET) for the tightest spreads
The Spread: What You Pay to Trade
The bid is the highest price someone is willing to pay for an ETF share. The ask is the lowest price someone is willing to sell for. The difference — the spread — is an implicit transaction cost. If VOO's bid is $499.99 and ask is $500.01, the spread is $0.02. You buy at $500.01 and the true mid-price is $500.00 — so you 'overpay' by $0.01 per share.
On a $10,000 purchase of VOO (about 20 shares), that $0.01 spread costs you $0.20. Completely irrelevant. But on a niche ETF with a $0.30 spread, the same $10,000 purchase costs you $60 in spread — equivalent to 0.60% of your investment, gone before you earn a single cent.
Typical Spreads by ETF Category
| ETF Category | Example | Typical Spread | Cost on $10,000 |
|---|---|---|---|
| S&P 500 (mega-liquid) | SPY, VOO | $0.01 (0.002%) | $0.20 |
| Total market (very liquid) | VTI, ITOT | $0.01 (0.004%) | $0.40 |
| International (liquid) | VXUS, VEA | $0.02-0.05 | $2-5 |
| Sector (moderate) | XLK, XLE | $0.02-0.05 | $2-5 |
| Thematic (less liquid) | BOTZ, ICLN | $0.05-0.20 | $5-20 |
| Small/new ETFs | Various | $0.20-0.50 | $20-50 |
How to Minimize Spread Costs
Five rules: (1) Stick with high-volume ETFs for core positions — SPY, VOO, VTI, BND all have penny spreads. (2) Avoid trading in the first and last 15 minutes of the trading day when spreads widen. (3) Use limit orders for any ETF with a spread above $0.05. (4) Trade during U.S. market hours even for international ETFs — underlying stock markets may be closed after hours, widening spreads. (5) For automatic recurring purchases, your broker typically handles order timing for you.
For buy-and-hold investors purchasing liquid ETFs monthly, spread costs are so small they are essentially zero. The spread only becomes a meaningful expense if you trade frequently or use illiquid funds.
Tip: Check the current bid-ask spread on your broker's order screen before buying. If the spread is wider than $0.10 on a stock ETF, consider waiting or using a limit order set near the midpoint.
Frequently Asked Questions
Is the spread a one-time cost or ongoing?
You pay the spread each time you trade — once when buying and once when selling. For a buy-and-hold investor making one purchase per month, the annual spread cost on liquid ETFs is less than $5 on a $50,000 portfolio. It is effectively insignificant.
Why are some ETF spreads wider than others?
Spread width depends on: the ETF's trading volume (more volume = tighter spread), the liquidity of underlying holdings (liquid stocks = tighter ETF spread), the number of market makers (more competition = tighter spread), and time of day (midday has the tightest spreads).
Should I use market orders or limit orders?
For VOO, VTI, SPY: market orders are fine — the spread is one penny. For any ETF with a spread above $0.05, use a limit order to control your execution price. Set the limit at or near the midpoint between bid and ask.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.