In the ETF world, market makers work hard to ensure that funds trade as closely to their net asset values (NAV) as possible.

Usually, this isn’t a problem for highly liquid funds like the SPDR S&P 500 (SPY), where the spread is usually just a penny or two.

However, for some very low-volume ETFs, wide bid-ask spreads do exist. Those wide spreads can be thought of as a hidden cost to investors. Trading ETFs with large spreads eat away at potential returns since they affect the price at which an ETF purchase or sale is made. Investors may potentially also purchase an ETF above its NAV and be paying a premium for the basket of securities.

There are a few ways for investors to avoid this phenomenon. First, investors should try and stick with liquid funds that trade often. The more shares traded each day reduces wide bid-ask spreads. Secondly, using limit orders––which allow investors to sell or buy a certain amount of stock at a given price or bette––will help reduce this issue. All ETFs have a NAV ticker that displays what the actual basket of assets is worth. Finally, focusing on the long term will smooth out any premiums to NAV as your investment grows.

Commission Fees

While the Internet age has reduced the fees investors pay to buy and sell stocks and ETFs, there is still no free lunch when it comes to trading. Most brokerage firms still charge fees when an investor buys or sells ETFs. These fees can stack up if someone is dollar cost averaging or trading a fund position.

For example, if you buy the previously mentioned SPY every month to build a long-term core position, those costs could amount to nearly $120 a year––assuming you pay $10 a trade. Adding in any additional brokerage account fees for the number of shares and you’re looking at some serious expenses.

However, there are several brokerage platforms that offer commission-free ETF trading. Popular ETFs like the Vanguard FTSE Emerging Markets (VWO) or Vanguard REIT Index ETF (VNQ) can be traded for free if you are a Vanguard customer, while account holders at TD Ameritrade can choose from over 100 different commission-free ETFs.

The Bottom Line

While ETFs have driven down the costs for investors, there are still fees associated with adding these financial instruments to your portfolio. Being aware of these various costs that come along with the security is necessary to gain the most from your investment.