Secondary market metrics

Welcome to our ETF education video series. In this third video, we’re discussing the key metrics used to evaluate the efficiency of an ETF’s secondary market. If you missed our first two videos discussing the mechanics of the ETF ecosystem and ETF liquidity, be sure to catch them on our website, ThriventETFs.com.

The metrics that we’re going to highlight in this video are bid/ask spreads and premiums and discounts – both of which are measures of how efficient the secondary market for an ETF is. Specifically, they provide information on the costs of trading an ETF, and how closely an ETF’s shares are trading to their underlying value.

So, let’s start with the “bid/ask spreads.” The bid/ask spread represents the difference between the top of the order book during the trading day. Or, the difference between the highest price that buyers are willing to pay and the lowest price that a seller is willing to accept. Bid/ask spreads are important because they represent a trading cost to investors who buy and sell an ETF. Given equal holding times, an ETF with wider bid/asks spreads will have a higher total cost of ownership than an ETF of the same management fee but with narrower bid/ask spreads

Bid/ask spread width can also give a relative indication of how liquid the underlying securities within the ETF are, with narrower spreads generally indicating more liquid underlyings, resulting in lower trading costs for investors.

The next metric of secondary market efficiency is that of “premiums and discounts.” An ETF’s premium or discount measures the difference between the market price for shares and the underlying net asset value of the fund.

An ETF trading at market prices higher than the underlying net asset value is trading at a premium, and an ETF trading at market prices lower than its underlying net asset value is trading at a discount. It’s important to understand premiums and discounts because they too can represent a cost of trading an ETF’s shares and influence total cost of ownership

Tune into the next video in this series to learn about the multiple prices associated with ETFs, and how to understand them. And if you are interested in learning more about the lineup of ETFs at Thrivent Asset Management, connect with a dedicated Thrivent consultant serving regional and national accounts at ThriventETFs.com/contactus.