Active Versus Passive ETFs: An Investigation of Bid-Ask Spread

Abstract

This paper expands the debate of active vs. passive management by focusing on an aspect that has not been thoroughly examined yet. More specifically, the study investigates the bid-ask spread of the German actively and passively managed Exchange Traded Funds (ETFs). Passive ETFs are found to have higher average spread than active ETFs. In the regression analysis, the bid-ask spread is found to be persistent through time cross-sectionally. Further regression analyses indicate that the bid-ask spread is negatively related to volume, indicating that the increased market activity narrows the deviations in the prices offered by buyers and sellers and results in more convenient and immediate transactions. The study also finds that the absolute value of ETFs’ premium positively affects the bid-ask spread. Finally, the bid-ask spread is found to affect the tracking ability of the ETFs in a positive way.