ETF Trading and PFOF
Exchange-traded funds trade like stocks — they are bought and sold throughout the trading day at market prices. Each ETF purchase or sale through a discount broker is routed through the same PFOF arrangements as stock trades. Citadel Securities is a major market maker in ETFs, providing continuous two-sided quotes for ETF shares.
ETF Bid-Ask Spreads
ETF bid-ask spreads vary widely by fund. Highly liquid large-cap ETFs like SPY (S&P 500 ETF Trust) typically have very tight spreads — often $0.01 or less. Less liquid ETFs can have wider spreads. For investors buying ETFs regularly, the accumulated spread cost across many small transactions can be meaningful over time, particularly for lower-volume ETFs.
The Index Investor Fallacy
Passive index investors sometimes believe they are insulated from market structure costs because they do not actively pick stocks. But PFOF affects execution quality on every ETF trade. An investor who buys a broad-market ETF every month through a PFOF broker incurs slightly worse execution on each purchase than they would through direct-routing alternatives. Over decades, these small differences compound.
Practical Implications for ETF Investors
For long-term ETF investors who trade infrequently, PFOF's impact is minimal — small differences on a few transactions per year have negligible long-term effect. For investors who systematically invest larger amounts monthly (dollar-cost averaging), using a broker with superior execution quality and minimal PFOF — or using limit orders at fair value — can meaningfully improve outcomes over time.