Explain how an ETF's market price, its net asset value and the bid-ask spread fit together.
When you buy an ETF, you pay roughly the ask price. When you sell, you get roughly the bid. The last price on your screen is for looking only.
Nadia is thinking about buying an ETF. She opens her broker's app and sees a price of S$3.50. Beside it are two figures she didn't expect: a bid of S$3.49 and an ask of S$3.51. The screen is made up for this example, but the layout is what you will see. She wonders which one is the real price. All three are real. The S$3.50 is for looking, the bid is for selling and the ask is for buying.
An ETF has two prices worth knowing. The first is the net asset value (NAV), which is the value of the fund's holdings divided by the number of units. Say a fund owns S$500 million of shares and has 100 million units (example figures). Its NAV is S$5 a unit. The fund manager calculates NAV, usually once a day after markets close. Many issuers also publish an estimated NAV during trading hours.
The second is the market price. An ETF trades on SGX during market hours, like a share. Its market price is whatever buyers and sellers agree on at that moment, and it is the price you actually pay or receive.
The two usually stay within a few cents of each other. Large firms, often called authorised participants, keep them together. They can create new units, or hand units back to the fund in exchange for the underlying shares. If the market price drifts above NAV, they create units cheaply and sell them, which pushes the price down. If it drifts below NAV, they buy units and hand them back to the fund, which pushes the price up. You don't need to follow these mechanics. The point is that the price should track what the fund owns. A big gap between market price and NAV is a sign something unusual is going on.
The bid is the highest price someone is currently willing to pay. If you sell now, you get roughly the bid. The ask, sometimes called the offer, is the lowest price someone is currently willing to sell at. If you buy now, it costs you roughly the ask.
On most ETFs, firms called market makers quote both a bid and an ask through the day, so there is always someone to trade with. The bid-ask spread is the gap between the two, and it is how market makers get paid for that service. It is a real cost to you, even though it never appears as a fee on the contract note. It still applies if you don't buy and sell on the same day, because every buy is a little above the midpoint and every sell is a little below it.
You can measure the spread in a few steps. Using Nadia's figures, first read the bid and the ask: S$3.49 and S$3.51. Subtract the bid from the ask to get the spread in cents: S$3.51 - S$3.49 = 2 cents. Find the midpoint between the bid and the ask, which is S$3.50. Divide the spread by the midpoint to get the spread as a percentage: 2 cents / S$3.50 = about 0.57%.
To get a dollar cost, multiply the spread per unit by the number of units. If Nadia buys 400 units at the ask and sells straight back at the bid, she loses 2 cents a unit. That comes to S$8 in total, before any commission.
Some ETFs trade millions of units a day. Others trade a few thousand, or none at all on a quiet day. Busy funds have market makers competing with each other, so spreads stay narrow, often a cent or so. Quiet funds have wider spreads, and the last trade shown may be hours old. On a quiet fund, a wide spread can cost a small investor more than a year of the fund's management fee.
When you look up an ETF, check the volume and the current spread as well as the last price. Daily volume is shown in the broker's app and on the SGX website. Lesson 3.4 of Build and run an ETF portfolio, "Fund size, trading volume and the bid-ask spread", compares funds by volume and spread in more depth.
The last price is the price of the most recent trade. On a quiet fund, that trade may have happened before something moved the market. The bid and ask show what you can trade at now. If they are well away from the last price, believe the bid and ask.
Nadia now reads her screen in this order:
the ask first, because she is buying (if she were selling, the bid first) then the other side, the bid then the spread as a percentage of the midpoint then the daily volume and if the bid and ask are well away from the last price, she trusts the bid and ask
To try it yourself, look up one SGX-listed ETF on the SGX website or in your broker's app during market hours. Note its last price, bid and ask, and work out the spread as a percentage of the midpoint.
Look up one ETF on the SGX website. Write down its last price, its bid and ask, and the spread as a percentage.
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