Scott Burns: Evaluating all the costs in trading and owning an ETF. Hi there. I'm Scott Burns, Director of ETF Research with Morningstar. Joining me today to talk about all the costs that come with owning an ETF is Rick Genoni, who is the head of Vanguard's ETF business -- Rick.
Rick Genoni: Thanks for having me.
Burns: Thanks again. I don't know if Vanguard needed to send somebody so high up the chain to talk about some basics, but I'm glad you're here to talk about that. When we look in the news right now, there are a couple of competitors for you and other distribution firms that are offering no-trade ETFs, which we think is a great development.
Trading costs -- that when you click on your in and out of the ETF trade -- that's just part of the trading costs that are out there. Maybe you could walk viewers through all of the things that factor into that ETF trade, so they understand all the costs that are embedded.
Genoni: I'll start by saying that certainly any move in the marketplace to lower all end fees for the end client is a very positive one. Certainly, Scott, there are other costs. Beyond just your up front fees on trading a product, you have to think about bid-ask spreads.
You have to think about actual execution quality. Were you able to execute your entire trade at the price that you set out to, or did you enter a market order and you pushed the price?
You have to think about fund management fees; such things as tracking error. How well did the fund do in terms of managing taxes? These are all, I think, critical factors when looking at the right product.
Burns: I think for investors out there, the bid-ask is one of the harder costs to get their hands around. It's very intangible. It does factor into the purchase. How do you recommend investors really manage that bid-ask process, and even just that trading execution? They're both pretty related.
Genoni: I think it's critical for clients to speak with somebody who understands the marketplace. If a retail client truly doesn't understand what the bid-ask prices are, they should be speaking to someone who has that background and can offer them the right level of education.
Certainly, Vanguard's brokerage group could help with that. These are all critical factors. Bid-ask spreads are something that industry-wide have been coming down. It's the more niche products that tend to trade with slightly wider bid-ask spreads and...
Burns: I also find the products with less than liquid underlying, too. That has a lot to do with it.
Genoni: Yeah. There are probably two drivers there. One is looking at the volume of the ETF overall, and then the second is looking at the volume of the underlying stocks or bonds in that basket and how tradable those are. That will drive the bid-ask spreads on the ETF.Read Full Transcript
Burns: I think it's also important for investors to think about using limit orders, too. Even an ETF that looks like it has a lot of trading volume over the past three months might not have it on that particular day. I know Vanguard, with some of your newer products, not every new product gathers hundreds of millions of dollars in assets and liquidity. It's not just from the sponsor, it's really on a fund by fund basis.
Genoni: Yeah, certainly there are products that have enough volume in trading that you can feel real good about entering market orders. Some of the less liquid products, mainly the ones with lower volume, you should be thinking, at least, about using limit orders.
It comes down to how many shares you're trading. If you're trading 50 shares, then a market order for many products is probably fine. If you're trading 5,000 shares in a given product, then you may start thinking about using a limit order.
Burns: Now I'm going to put you on the spot, here. So Vanguard Total Bond BND, very popular fund. If I wanted to put a $5 million dollar market fund order in right now, would I get executed at a penny wide?
Genoni: You know that every day is different, so I can't say at the time that you are trying to put that trade in that you would definitely get executed at a penny wide. That is a product that is trading a penny wide almost every day, throughout the whole trading day, volume is about one million shares per day.
We feel really good about the volume in that product. I would say, look at the volume at that time. Look at the size at that time. That's whether you think you can get that full trade through.
Burns: All right, Rick. That's great advice for an institutional advisor or individual investors. Thanks for joining me.
Genoni: Thanks again, Scott.
Burns: I'm Scott Burns with Morningstar. For this and other ETF commentary, please check out Morningstar.com's ETF Center and Morningstar.com's ETFInvestor Newsletter.