Australian ETF trading costs skyrocket, as market makers feast on $ 27 million slide


ETF trading costs skyrocketed in March, with Australians paying more than $ 27 million to trade, new ASX data reveals.

As the volatility of coronaviruses rocked the markets, the buy and sell price of ETFs – known as “spreads” – increased dramatically. In March, the average spread on an Australian ETF was 31 basis points, meaning that for every $ 10,000 of ETFs traded, investors paid $ 31 round trip. This was almost triple the February $ 12 average.

Source: ETF flow, ASX

Despite the higher costs, investors billed like the light brigade with more ETFs changing hands in March than any month before.

The result of this – more trades, higher transaction costs – was that Australians paid over $ 27 million to buy and sell ETFs during the month. This is an increase from the $ 5 million paid in February and the $ 3.5 million paid in January.

Much – but not all – of that $ 27 million will have gone to professional trading companies called market makers. Most ETFs traded on ASX are controlled by market makers, although some are also controlled by private investors.

It is difficult to calculate exactly how much of the $ 27 million will have been spent as gross profits by market makers. While market makers are known to profit when volatility increases, their own trading and hedging costs also increase. This means that a complete picture of the profitability of market makers is very difficult to build. However, if the United States is a guide, the market making benefits will be greatly increased.

According to Andrew Campion, head of investment products at ASX, ETFs have proven to be very resilient given the difficult market conditions.

“March was a month of unprecedented volatility for … stocks, interest rate and equity derivatives, and ETFs. Reduced liquidity … is a natural consequence of increased volatility as market participants seek to manage risk, and ETFs are not immune to this. ,” he said.

“The fact that we had several days of over $ 1 billion ETF traded value during the month demonstrates the growing importance of ETFs as an investment tool.”

Issuers felt March volatility differently

Source: ETF flow, ASX

While volatility and wider spreads hit every ETF and provider, there were big differences between ETFs and companies.

State Street sailed through March – relatively speaking – with its funds traded on some of the tightest spreads. Other ETF providers have faced more turbulent waters, especially those with the largest number of ETFs holding illiquid securities or being actively managed.

Van Eck’s average spread was the highest of any index ETF provider. However, its spreads were lower than those of some actively managed ETFs. Global fund giant Fidelity, for example, saw its emerging market ETF spreads nearly triple to 1.2%.

Source: ASX, ETF flow

Oddly enough, one fund has seen its spreads fall: the K2 Australian Small Cap Fund (KSM), which is provided by Melbourne-based hedge fund K2 Asset Management.

The fund invests in small Australian companies. Yet despite the widening of spreads on its underlying holdings, KSM’s spreads have narrowed. KSM had by far the widest spreads of any Australian ETF in history.

K2 refused ETF flows request for comment.

Hyper-liquid ETFs are not immune

Even the powerful have not been spared. The iShares S&P 500 ETF (IVV) – one of the world’s most popular ETFs, with $ 175 billion under management globally – saw its spreads widen by 4 to 15 basis points on the ASX .

Keeping ETFs that track the S&P 500 on tight spreads is usually fairly easy as there are tools that traders can use – called “hedges” – to smooth out wrinkles. These hedges include S&P 500 futures contracts as well as other S&P 500 ETFs.

ETF with the widest spreads in March

Source: ASX, ETF flow

The abundance of hedges means that in the United States, IVV typically trades on a tiny 1 basis point spread, making it one of the easiest and cheapest securities to trade globally.

But rather unusually, and a sign of the severity of last month’s volatility, the S&P 500’s hedges – including both futures and other ETFs – also saw their spreads deteriorate. This meant that the spreads on IVV collapsed.

Clues matter

March’s volatility also showed that ETF spreads can be influenced by the index they track, even for ETFs which are nominally the same.

The Vanguard Australian Shares Index ETF (VAS) is generally the most popular and traded Australian ETF. Yet VAS has seen its spreads explode more than its less traded competitors, State Street’s SPDR S & P / ASX 200 ETF (STW) and iShares S & P / ASX 200 ETF (IOZ).

Source: ETF flow, ASX

This was thanks to VAS which tracked the ASX 300 index rather than the more famous ASX 200 index. The lesser known ASX 300 index contains smaller companies that trade much less. This can mean that it is more expensive to buy and sell all stocks held by VAS and can make Australian stock index futures, called SPIs, less precise hedges.

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