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This chapter is from the book

Special Risks of ETFs

As already discussed, ETF share prices are sensitive to the balance between supply and demand—a risk absent from regular mutual funds. ETF investors face the additional risk of relying on authorized participants to keep ETF prices in line with the underlying share values. During fast markets—periods marked by an overwhelming imbalance between supply and demand—authorized participant firms and specialists have been known to be slow to step up and fill the wave of orders. The result is that at the time you are most anxious to sell, you might not be able to get as fair a price (relative to the value of the underlying shares) as you thought you would. The bid-ask spreads illustrated in Table 1.1 were obtained during a normal market. If you buy or sell during a fast market, your bid-ask spread costs will be higher than normal.

Table 1.1. Bid-Ask Spreads as a Percentage of the Share Price for Selected U.S. Equity ETFs During Normal Midday Market Conditions in the Fall of 2005*

ETF Name

ETF Ticker Symbol

Investment Objective

Bid Price ($)

Ask Price ($)

Bid-Ask Spread as % of Midpoint

Size of Market (Shares in 100s, Bid Ask)

S&P 500 Depository Receipts

SPY

Large cap

123.81

123.83

.02%

750 × 400

iShares Russell 100 Index Fund

IWB

Large cap

67.08

67.16

.12%

100 × 132

Vanguard Large Cap Vipers

VV

Large cap

54.77

54.84

.13%

500 × 600

Diamonds Trust

DIA

Large cap

107.06

107.08

.02%

600 × 300

iShares Russell 1000 Growth Index Fund

IWF

Large growth

50.62

50.69

.14%

100 × 600

iShares S&P 500 Growth Index Fund

IVW

Large growth

58.71

58.81

.17%

600 × 900

Vanguard Growth Vipers

VUG

Large growth

53.06

53.11

.09%

300 × 379

iShares Russell 1000 Value Index Fund

IWD

Large value

68.40

68.49

.13%

600 × 620

iShares S&P 500 Value Index Fund

IVE

Large value

64.40

64.51

.17%

300 × 600

Vanguard Value Vipers

VTV

Large value

56.39

56.44

.09%

491 × 94

iShares S&P 400 Midcap Index Fund

IJH

Midcap

72.12

72.16

.06%

30 × 30

S&P Midcap SPDR

MDY

Midcap

131.46

131.49

.02%

300 × 125

Vanguard Extended Market Index Vipers

VXF

Midcap

89.13

89.25

.13%

600 × 600

iShares Russell Midcap Index Fund

IWR

Midcap

85.83

85.91

.09%

490 × 1000

iShares Russell Midcap Growth Index Fund

IWP

Midcap growth

90.99

91.10

.12%

300 × 900

iShares S&P 400 Midcap Growth Index Fund

IJK

Midcap growth

73.33

73.43

.14%

300 × 300

iShares Russell Midcap Value Index Fund

IWS

Midcap value

122.22

122.28

.05%

10 × 74

iShares S&P 400 Midcap Value Index Fund

IJJ

Midcap value

69.34

69.45

.16%

300 × 300

iShares S&P 600 Index Fund

IJR

Small cap

57.42

57.47

.09%

50 × 50

iShares Russell 2000 Index Fund

IWM

Small cap

66.21

66.22

.02%

500 × 32

iShares Russell Microcap Index Fund

IWC

Small cap

50.51

50.59

.16%

200 × 300

Vanguard Small Cap Vipers

VB

Small cap

58.93

59.02

.15%

300 × 300

Vanguard Small Cap Growth Vipers

VBK

Small cap growth

56.99

57.15

.28%

500 × 500

StreetTracks Small Cap Growth

DSG

Small cap growth

79.71

79.87

.20%

50 × 50

iShares S&P 600 Small Cap Growth

IJT

Small cap growth

114.60

114.70

.09%

3 × 25

iShares Russell 2000 Growth

IWO

Small cap growth

68.55

68.59

.06%

130 × 60

Vanguard Small Cap Value Vipers

VBR

Small cap value

61

61.11

.18%

900 × 600

StreetTracks Small Cap Value

DSV

Small cap value

62.01

62.17

.26%

50 × 100

iShares S&P 600 Small Cap Value

IJS

Small cap value

63.89

63.98

.14%

300 × 300

iShares Russell 2000 Value

IWN

Small cap value

65.88

65.92

.06%

95 × 40

Select Energy Sector SPDR

XLE

Sector energy

47.6

47.65

.10%

200 × 315

iShares Dow Jones U.S. Financial Index Fund

IYF

Sector financial

100.77

100.91

.14%

300 × 900

iShares Dow Jones U.S. Financial Services Index Fund

IYG

Sector financial

113.54

113.68

.12%

300 × 900

Select Financial Sector SPDR

XLF

Sector financial

31.58

31.59

.03%

600 × 1000

Vanguard Financial Vipers

VFH

Sector financial

55.78

55.87

.16%

300 × 300

Vanguard Health Care Vipers

VHT

Sector health care

53.07

53.16

.17%

300 × 600

Select Health Care Sector SPDR

XLV

Sector health care

30.96

30.98

.06%

900 × 100

iShares Dow Jones U.S. Healthcare Index Fund

IYH

Sector heath care

61.76

61.85

.15%

300 × 600

iShares Cohen & Steers Realty Majors Fund

ICF

Sector REITs

73.28

73.37

.12%

110 × 120

iShares Dow Jones U.S. Real Estate Index Fund

IYR

Sector REITs

64

64.02

.03%

56 × 130

Vanguard REIT Vipers

VNQ

Sector REITs

59.79

60.04

.42%

100 × 100

iShares Dow Jones U.S. Technology Index Fund

IYW

Sector technology

49.55

49.62

.14%

900 × 100

Select Technology Sector SPDR

XLK

Sector technology

21.10

21.12

.09%

330 × 1400

iShares Goldman Sachs Technology Index Fund

IGM

Sector technology

46.97

47.04

.15%

101 × 230

Vanguard Information Technology Vipers

VGT

Sector technology

48.03

48.12

.19%

600 × 600

Utilities HOLDRs

UTH

Sector utilities

109.22

109.30

.07%

100 × 65

Select Utilities Sector SPDR

XLU

Sector utilities

30.45

30.48

.10%

1200 × 800

Vanguard Utilities Vipers

VPU

Sector utilities

63.34

63.46

.19%

900 × 600

iShares Russell 3000 Index Fund

IWV

Total market

74.32

74.42

.13%

100 × 100

iShares Dow Jones Total Market Index Fund

IYY

Total market

62.51

62.59

.13%

100 × 100

Vanguard Total Market Vipers

VTI

Total market

121.95

122.07

.10%

100 × 900

iShares Lehman Aggregate Bond Index Fund

AGG

Bond

99.39

99.79

.40%

300 × 350

iShares Lehman 7-10 Year Treasury Note Fund

IEF

Bond

82.47

82.55

.10%

350 × 1000

iShares Lehman TIPS Fund

TIP

Bond

102.26

102.46

.20%

400 × 400

iShares Goldman Sachs Investop Corp Bond Fund

LQD

Bond

106.09

106.76

.63%

300 × 250

iShares Lehman 20-Year Treasury Bond Fund

TLT

Bond

88.72

88.82

.11%

2500 × 2500

iShares 1-3 Year Treasury Note Fund

SHY

Bond

80.08

80.13

.06%

1000 × 1000

Actually, if you like to trade against the crowd, ETF pricing can work in your favor. You might be able to buy the ETF you want at a discount to its fair value if panic selling is occurring. If you are looking to sell ETF shares, you might be able to get more than fair value if buyers are clamoring for what you are selling.

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