Spread: Why You Pay a Hidden Fee on Every ETF Purchase

Jana, 29, from Prague, bought her first ETF last year. On her brokerage account she saw she paid zero transaction fees. Excellent, she thought. But three days later she noticed that even with zero explicit charges she had bought slightly more expensive than the price she had been watching the day before. What happened? She paid the spread. This happens to every investor on every trade — few people know how large that cost is and how to bring it under control.

What is bid, ask and why does the gap between them exist?

Every exchange operates as a market with a dual price. There is the bid — the highest price a buyer is willing to pay at a given moment. And there is the ask — the lowest price a seller is willing to accept. The difference between these two numbers is the spread.

A practical example: VWCE trades at a given moment with a bid price of, say, 105.00 EUR and an ask price of 105.05 EUR. The spread is 0.05 EUR, or approximately 0.05%. If you buy at the ask (105.05 EUR) and immediately sell at the bid (105.00 EUR), you lose those 0.05 EUR per share with no market movement. Those are your liquidity costs.

Why does this gap exist at all? Because market makers — firms that ensure there is always a counterparty for your order — need to be compensated for their service and for the risk they carry while holding the ETF on their books. The spread is their margin. Without market makers, an ETF would be practically untradable — you might wait hours for a counterparty.

An important nuance: the spread differs from the broker's transaction fee. The broker's fee appears explicitly in your transaction statement. The spread is built into the price — it won't appear anywhere in the trade details, only as a slightly worse execution price.

How large a spread do you pay on different ETFs?

This varies dramatically, and it matters most.

• Mega-liquid ETFs (VWCE, CSPX, IWDA): spread 0.01–0.05%. Daily volumes are enormous; market makers can afford a tiny margin and still earn on volume.
• Mid-liquidity ETFs (CNDX, ZPRV, SXR8): spread typically 0.05–0.15%. Still acceptable for long-term DCA investing.
• Sector and thematic ETFs (ARKX, space funds, specific EM themes): spread can be 0.20–0.50% or more. Smaller fund, lower daily volume, larger spread for every buyer.
• Very illiquid or new ETFs: spread over 1%. That is a hidden fee you won't see in any statement for years.

To illustrate: if you invest 100,000 CZK in an ETF with a 0.40% spread and trade four times a year (two buys, two sells), you pay roughly 1,600 CZK annually in spread alone — and your broker sends you no email about that.

When does the spread hurt most and when do you barely feel it?

The spread is a relative cost — it depends primarily on how long you hold the investment and how often you trade. The maths is simple but underestimated by investors.

If you buy an ETF once a month as part of a DCA strategy and plan to hold for 15 years, a spread of 0.05% is practically negligible. You pay it on entry and on exit 15 years from now — a total of roughly 0.10%. Spread over 15 years that is 0.007% annually. Ignore it.

But if you actively speculate, rebalance your portfolio every month or trade sector ETFs with high spreads, costs accumulate quickly. An active trader with an average spread of 0.30% and twenty transactions a year pays more in spread than most brokers charge explicitly.

Then there is intraday timing. The first and last 15 minutes of a trading session tend to have the highest spread. The market is just "waking up" or "going to sleep"; market makers are more cautious and bid-ask widens. Trading in the middle of the day, when volumes are highest and market makers most active, is one of the simplest rules for reducing the spread.

Limit orders: the simplest way to control the spread

A market order tells the broker: buy now, at whatever price the market offers. A limit order says: buy, but only if the price drops to X or below. The difference is not technical — it is in control.

If you place a limit order at or slightly above the bid, you wait — but you don't pay the full spread. You are essentially trying to stand on the market maker's side. The downside? The order may not fill if the market moves the wrong way. For regular DCA purchases this means keeping a slight eye on things. For single larger investments it almost always makes sense.

Let me be direct: beginning investors use market orders because they are simple. More experienced ones use limit orders because they are cheaper. The difference is not a matter of economic knowledge — it is one field in the brokerage interface worth finding.

Spread in the context of other costs and taxes

The spread is just one of three main costs of investing in ETFs. Alongside it you pay the TER (total expense ratio — the annual fund fee), which is visible in the prospectus, and the broker's transaction fee, which you see in the trade confirmation. The spread hides in the price and is the least transparent of all three.

The good news is that for liquid UCITS ETFs on large indices (S&P 500, MSCI World) the spread is so small that as a long-term investor you practically don't worry about it. Focus on TER and broker selection. The problem comes with exotic sectors, thematic funds or ETFs with small AUM — there the spread can easily exceed the entire annual TER of the fund.

Total investment costs are like daily weather — one bad decision won't soak you, but someone who ignores the forecast repeatedly will eventually get cold. Controlling the spread takes a minute. It's worth it.

Practical overview: when to watch the spread and when to ignore it

Let's sum it up in a simple guide. Ignore the spread if you are buying large liquid ETFs (VWCE, CSPX, IWDA) once a month as part of DCA and plan to hold for years. The total impact is negligible. Watch the spread carefully if you are buying sector or thematic ETFs with low liquidity, trading at peak times of day or planning frequent rebalancing. In such cases, check the current bid-ask in your brokerage interface before each transaction and consider a limit order. Conscious management of the spread is not financial magic — it is basic hygiene that costs you nothing and saves real money.