Understanding Bid-Ask Spread
Posted: June 23rd, 2024, 5:24 pm
Hello,
I'm fairly new to investing but have spent the last few months reading various books, blogs and forums to slowly increase my knowledge. I decided to invest in trackers of the FTSE All-World index in my S&S ISA. VWRP has an OCF of 0.22% so I decided to invest in VHVG (Developed Markets) at 0.12% OCF and VFEG (Emerging Markets) at 0.22% OCF which comes to 0.13% total when at a 90:10 split, thereby saving 0.09% per year in fees - clever me!
However I've begun learning about the bid-ask spread on ETFs and I am now wondering if I should have invested in VWRP instead.
Hargreaves Lansdown has the following indicative spread on their website today:
VWRP: 0.06%
VHVG: 0.07%
VFEG: 0.15%
Therefore at a 90:10 ratio I'm getting an indicative spread of 0.078% on buying VHVG + VFEG. Compared to VWRP, the spread difference is 0.018%.
I decided to workout how long it would take to reach a break even point between the lower spread of VWRP and the lower fees of VHVG + VFEG using an example of £100k invested as a lump sum.
Using the spread difference of 0.018% the £100k would drop to £98,200. If I then compound the £98,200 at 1.0009% per year (the saving in fund fees) it takes 21 years to catch up to £100k! Assuming the spreads are similar in 21 years I'd lose out again during the selling process so to truly break even I'd actually have to hold the funds for 42 years!!
Am I correct? Have I correctly interpreted how the bid-ask spread works?
I realise that in the grand scheme of things this small % difference won't make a significant impact on my life and that by buying earlier or later in a given day the price could move by much more than the spread. However I thought it would be useful to work through this example to check my understanding.
Additionally, I looked at the new FWRG ETF which also tracks the FTSE All-World index. It has an OCF of 0.15% and an indicative spread of 0.22% so would be even worse than VHVG + VFEG.
Thanks,
Zane
I'm fairly new to investing but have spent the last few months reading various books, blogs and forums to slowly increase my knowledge. I decided to invest in trackers of the FTSE All-World index in my S&S ISA. VWRP has an OCF of 0.22% so I decided to invest in VHVG (Developed Markets) at 0.12% OCF and VFEG (Emerging Markets) at 0.22% OCF which comes to 0.13% total when at a 90:10 split, thereby saving 0.09% per year in fees - clever me!
However I've begun learning about the bid-ask spread on ETFs and I am now wondering if I should have invested in VWRP instead.
Hargreaves Lansdown has the following indicative spread on their website today:
VWRP: 0.06%
VHVG: 0.07%
VFEG: 0.15%
Therefore at a 90:10 ratio I'm getting an indicative spread of 0.078% on buying VHVG + VFEG. Compared to VWRP, the spread difference is 0.018%.
I decided to workout how long it would take to reach a break even point between the lower spread of VWRP and the lower fees of VHVG + VFEG using an example of £100k invested as a lump sum.
Using the spread difference of 0.018% the £100k would drop to £98,200. If I then compound the £98,200 at 1.0009% per year (the saving in fund fees) it takes 21 years to catch up to £100k! Assuming the spreads are similar in 21 years I'd lose out again during the selling process so to truly break even I'd actually have to hold the funds for 42 years!!
Am I correct? Have I correctly interpreted how the bid-ask spread works?
I realise that in the grand scheme of things this small % difference won't make a significant impact on my life and that by buying earlier or later in a given day the price could move by much more than the spread. However I thought it would be useful to work through this example to check my understanding.
Additionally, I looked at the new FWRG ETF which also tracks the FTSE All-World index. It has an OCF of 0.15% and an indicative spread of 0.22% so would be even worse than VHVG + VFEG.
Thanks,
Zane