You will be able to explain the link between an ETF's market price, its net asset value and the bid-ask spread.
Nadia opened her broker's app to look at an ETF she was considering. The screen showed a price of S$3.50, and then two more numbers she didn't expect: a "bid" of S$3.49 and an "ask" of S$3.51. She wondered which of them was the real price. All three are, as it turns out: one for looking, one for selling and one for buying.
This lesson explains how an ETF's price is set during the day, how that price relates to what the fund is actually worth, and the small cost you pay every time you trade.
An ETF has two prices worth knowing.
The first is the net asset value, or NAV. It's what the fund's holdings are worth, divided by the number of units. If a fund owns S$500 million of shares and has 100 million units, the NAV is S$5 a unit. The fund manager calculates it, usually once a day after markets close, and many issuers publish an estimate during trading hours too.
The second is the market price. An ETF trades on SGX during market hours, just like a share. Its market price is whatever buyers and sellers agree on at that moment. That's the price you actually pay or receive.
Most of the time the two stay close, within a few cents. They're kept together by large firms, often called authorised participants, which can create new units or hand units back to the fund in exchange for the underlying shares. If the market price drifts above the NAV, these firms can create units cheaply and sell them, which pushes the price down. If it drifts below, they buy units and hand them back, which pushes it up. You don't need to follow the mechanics. What matters is that the price you see should track what the fund owns, and a big gap is a sign something unusual is going on.
When you look at an ETF on your broker's screen, you'll see a bid and an ask, sometimes called an offer.
The bid is the highest price someone is currently willing to pay. If you sell right now, that's roughly what you get.
The ask is the lowest price someone is currently willing to sell at. If you buy right now, that's roughly what you pay.
The gap between them is the bid-ask spread. On most ETFs, firms called market makers keep quoting both a bid and an ask through the day, so there's always someone to trade with. The spread is how they get paid for that service. It's a real cost to you, even though it never appears as a fee on your contract note.
Nadia's made-up screen shows how to measure it. The bid is S$3.49 and the ask is S$3.51, so the spread is 2 cents. The midpoint between them is S$3.50. Two cents divided by S$3.50 is about 0.57%. That's the spread as a percentage.
To see what it costs in dollars, imagine buying 400 units at the ask and selling them straight back at the bid. You'd lose 2 cents on each unit, or S$8 in total, before any commission. You won't usually buy and sell on the same day, but the spread is still there. Each time you buy, you pay a little above the midpoint, and each time you sell, you get a little below it.
Some ETFs trade millions of units a day. Others trade a few thousand, or none at all on a quiet day. That difference shows up in the spread.
Busy funds have market makers competing, so spreads stay narrow, often a cent or so. Quiet ones are another matter. Spreads widen, and the last trade shown might be hours old. A wide spread on a quiet fund can cost a small investor more than a year of the fund's management fee.
So when you look up an ETF, check the volume and the current spread as well as the last price. Your broker's app and the SGX website both show daily volume. If you want to go further, lesson 3.4 of Build and run an ETF portfolio, Fund size, trading volume and the bid-ask spread, compares funds this way in more depth.
The "last price" is simply the price of the most recent trade. On a quiet fund, that trade might have happened before something moved the market. The bid and ask tell you what you can trade at now. If they're well away from the last price, believe the bid and ask.
Nadia now reads the screen in order: ask first, because she's buying, then bid, then the spread as a percentage. 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 and write down its last price, its bid and ask, and the spread as a percentage.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).