The first thing to notice is that the ETF spreads are tighter than the basket spreads most of the time. That’s one of the advantages of ETFs—they have their own secondary-market liquidity, which typically makes trading them easier and less expensive than it is for their underlying basket of securities.
Trading spreads widened in both instances. But the data also show that the widening this year was roughly twice that of 2019 and that the widening on a given day this year persisted, whereas spreads normalized quickly in 2019. In environments less volatile than this year’s, we’ve observed market makers widening out bids and offers before a Fed announcement, then quickly normalizing spreads within 15 minutes.
By comparison, Vanguard Spread Analytics has shown that this year, because of the unusually large Fed interest-rate increases, market makers have widened spreads more than during less volatile periods and kept wider spreads in play for longer periods of time—sometimes even until the end of trading sessions. Moreover, spreads this year have been wider in the hours ahead of Fed announcements than they were in 2019—another sign of greater volatility related to the Fed’s aggressive inflation-fighting posture.
The key takeaway: Investors should beware trading on days when important economic news such as a Fed announcement will come out during the trading session. They may want to avoid trading on such days, if possible.
The other factor to notice in the two charts is that at the beginning of each trading session, market makers have historically widened spreads for the first 15 to 30 minutes of the session before settling back to more normal ranges. Investors may want to avoid trading ETFs in the first half hour of every session, to minimize transaction costs.