ETF insights

Trading tips for ETF investors grappling with market volatility

November 11, 2022

A line chart traces changes in the federal funds rate between August 31, 2015, and November 9, 2002. It shows modest 25-basis-point rate hikes between 2015 and 2018, and relatively large rate hikes in 2022. It shows that the fed funds rate climbed 375 basis points so far in 2022 and 225 basis points in the three years between 2015 and 2018.
Two line charts show trading spreads of Vanguard Consumer Staples ETF (VDC) for two entire trading sessions—May 19, 2019, and June 15, 2022—both days when the Federal Reserve announced changes to the federal funds rate. Both charts show all bid-ask spreads widening markedly at the moment the Fed news hits markets at 2 p.m. Eastern time. But the widening of trading spreads in 2022 is considerably greater than in 2019 and persists for a longer amount of time in 2022 than it did in 2019. Each chart shows two sets of bid-ask spreads—one set showing spreads on the ETF and the other showing spreads on the entire basket of individual securities contained in the ETF. In both charts, the ETF spreads are, at all times, narrower than the spreads on the basket of underlying securities, in a clear sign the ETF has its own liquidity, which manifests in tighter spreads and results in lower trading costs. Both also show spreads widening in the first 30 minutes of each trading session, and the first chart also shows a sudden spike at 10 a.m. ET when the Institute of Supply Management’s monthly survey on U.S. manufacturing was released.
Two line charts show trading spreads of Vanguard Consumer Staples ETF (VDC) for two entire trading sessions—May 19, 2019, and June 15, 2022—both days when the Federal Reserve announced changes to the federal funds rate. Both charts show all bid-ask spreads widening markedly at the moment the Fed news hits markets at 2 p.m. Eastern time. But the widening of trading spreads in 2022 is considerably greater than in 2019 and persists for a longer amount of time in 2022 than it did in 2019. Each chart shows two sets of bid-ask spreads—one set showing spreads on the ETF and the other showing spreads on the entire basket of individual securities contained in the ETF. In both charts, the ETF spreads are, at all times, narrower than the spreads on the basket of underlying securities, in a clear sign the ETF has its own liquidity, which manifests in tighter spreads and results in lower trading costs. Both also show spreads widening in the first 30 minutes of each trading session, and the first chart also shows a sudden spike at 10 a.m. ET when the Institute of Supply Management’s monthly survey on U.S. manufacturing was released.
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