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There are three variable components that comprise the spread during the intraday trading. The first two are order processing costs and inventory costs. The third component of the spread is the information asymmetry component; compensation for trading with traders who have certain helpful information regarding a particular ETF. It has been seen that some traders have material information about the ETF that other traders do not have. This private information is the source of the information asymmetry among traders and gives informed traders an advantage over others.
ETFs can be considered as market basket securities that track market indices. They trade like common stock but the way they are build make them completely different from common stocks. The fact that getting private information on ETFs is more difficult and compared to common stocks, the information asymmetry component is less severe, and this means that exchange traded funds have lower trading costs compared to common stocks.
If you are the type who does not like to take risk or wants to build up your investment portfolio gradually, the exchange traded funds are the perfect investment vehicle for you. They are cost effective and much cheaper alternative to common stocks. Do not let the variable components frighten you. They will have just a small effect on the overall cost.
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