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r/CanadianInvestor•
journalctl

ETF unit price and average bid-ask spread (ZAG vs. XBB)

I'm currently comparing ZAG and XBB. Both track the FTSE Canada Universe Bond Index. Both have very high volume and almost always maintain a single cent bid-ask spread. However, the unit price of XBB is roughly twice of ZAG, which results in XBB being cheaper from an average bid-ask spread metric.

My question is why doesn't a popular ETF like ZAG increase their unit price via a reverse split to lower transaction costs for investors? Is there an incentive for BMO in this scenario to keep the unit price low so that they (or whoever the market maker is) profit more from the spread?

Posted Jan 18, 2023, 11:35 AM UTC

210
CarrotChungus•

I just dont think the etf creators care that much about your bid ask spread "loss".

There is generally an incentive to keep prices low to make it easier for retail investors, but that is like 50$ vs 500$ not 14$ vs 28$.

3
svanegmond•

If the NAV or price is twice as high you buy half as much.

The question seems based on a flawed understanding. Restate?

1
Snoo79189•

What OP is saying is that if one ETF is $50 and the other is $25, if the bid/ask spread is $0.01 on each, you’re losing 50% more to the bid/ask on the cheaper ETF when you sell because you’re losing twice as many pennies by buying/selling twice as many units.

Ultimately it’s just a case of making mountains out of mole hills

2
svanegmond•

This is flawed reasoning. You do not “lose money” on any bid ask spread. The last trade price is maybe at the bid, maybe at the ask, maybe in the middle. You pick your buying price with a limit order. If I think I’ll get a discount, I leave the buy open for a few days with a price that the stock has seen recently and 70% of the time I get it

2
journalctlOP•

You do not “lose money” on any bid ask spread.

We absolutely do. It's a fee that everyone pays for liquidity. Market makers don't work for free.

1
svanegmond•

Because someone else realizes a profit does not mean you have experienced a loss. The options market is zero sum but the stock market is not.

A notional loss occurs if the price descends below your purchase price. This happens sometimes within the day(s) after a purchase and is no consequence of bid ask spread. Unless the spread is enormous and you were silly enough to do a market order.

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Snoo79189•

Agree to disagree. Your order gets filled because of price fluctuations, not because slippage from the spread doesn’t exist. If you tried to buy a HISA ETF like CASH.TO (that has no volatility and only moves to account for interest earned on the underlying cash deposits) at the bid, I bet your success rate would drop to somewhere between 0-10%, because that has been my experience. Eventually you learn to just pay the extra penny to have the order filled.

1
svanegmond•

Those cash etf have a very particular price action unlike any other. Even during the worst market freak outs there was no deviation from their sawtooth price pattern.

1
journalctlOP•

Exactly. The US-listed AGG has a unit price of USD $100.42 while also maintaining a single cent bid-ask spread, making the cost of liquidity on that particular ETF about 10x cheaper than ZAG.

Ultimately it’s just a case of making mountains out of mole hills

I realize this has a trivial impact on me as an individual investor.

1
Godkun007•

The price makes 0 difference. If you have a pizza and split it into 6 pieces, and another pizza that is split into 12 pieces, the total size of the pizza isn't different.

Price is purely based on the outstanding shares. ZAG is cheaper because there are more shares so each share is worth less. It doesn't mean that the product is inherently worse, it could just be that they want to keep it cheap as a marketing gimmick and do a share split every now and again. If you have 2 $5 shares it would be identical in every way to having 1 $10 share.

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