April’s tariff-driven market volatility was the perfect proving ground for ETFs. During that period, ETFs withstood the many challenges the markets threw their way better than portfolios of the underlying securities, new Vanguard research shows.
In early April, tariffs roiled financial markets, presenting an opportunity to study whether ETFs performed better than the same securities traded outside the ETF vehicle. The first nine trading days of April were particularly intense. According to Bloomberg:
During times of heightened volatility, ETF bid-ask spreads tend to widen because of price uncertainty. This can increase transaction costs for investors who choose to trade during these periods.
Despite the volatility, Vanguard ETFs demonstrated remarkable resilience. Although bid-ask spreads widened in April, they remained significantly lower for the ETFs than for the underlying securities in their portfolios. Bid-ask spreads for ETFs’ underlying securities are typically larger than ETF spreads. Even at the height of the tumult in early April, this relationship held true, underscoring the cost efficiency of the ETF structure.
At peak volatility, Vanguard ETF spreads rose only by an average of about 4 basis points (bps)—from 2 bps to 6 bps—while spreads for the baskets they represent rose an average of 12 bps—from 16 bps to 28 bps. (One basis point equals one one-hundredth of a percentage point.)[1]
Notes: The bid-ask spread for all 91 Vanguard ETFs is calculated using the average daily spread for each Vanguard ETF weighted by the notional value traded. Basket spread represents the spread of the underlying basket using the same weighting.
Source: Bloomberg, as of April 11, 2025.
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To trade effectively, investors need to be aware of the different ways ETFs are priced. One key metric is the net asset value (NAV), which, as with mutual funds, represents the assessed or fair value of an ETF’s underlying securities.[2] However, unlike mutual funds, ETFs do not transact at NAV. Instead, ETF investors buy and sell at market prices, which are determined by supply and demand. As a result, an ETF’s market price can diverge from its NAV.
NAV and market price may differ for all types of ETFs, but the effect can be more pronounced for fixed income ETFs. In normal market conditions, fixed income ETFs often trade at modest premiums. However, at the beginning of April 2025, discounts for fixed income ETFs were significantly larger than usual.
These discounts arise from the differences in how the market prices ETFs and how pricing vendors calculate NAVs. Market makers’ ETF quotes typically reflect the current value at which the underlying bonds can be traded. In contrast, NAV valuations rely on various inputs, often based on backward-looking pricing methods. For this reason, ETFs’ market prices often reflect underlying market conditions more quickly than NAVs, making them valuable tools for price discovery.
The pricing disparity, known as a fixed income ETF’s perceived discount, is particularly noticeable in times of volatility. The level of these price differences in early April 2025 was similar to what markets experienced in other turbulent periods, such as March 2020 (at the start of the pandemic).
Note: The figure shows average daily premiums and discounts for U.S.-domiciled fixed income ETFs that had assets under management valued at $1 billion or more.
Source: Bloomberg.
When an ETF is trading at a premium or discount, investors should dig into the details. ETFs with relatively stable premiums and discounts are more likely to deliver better trading results for investors.
In times of market volatility, sometimes the smartest trade is no trade at all. However, there are instances when investors need to buy or sell, such as to meet wash-sale rules or raise cash.
“Fortunately, understanding best practices for trading ETFs can help investors reduce transaction costs and improve their outcomes even when markets swing dramatically,” said Patrick Hooper, Vanguard senior specialist, ETF Capital Markets.
These best practices include:
“Volatility in the markets is inevitable, but the ETF vehicle continues to shine in all market conditions,” said David Sharp, Vanguard director, ETF Capital Markets. “ETFs may trade at wider spreads or at perceived discounts to fair value, a cost imposed by trading in turbulent markets. But even when that happens, ETFs continue to be ideal vehicles for many investors, especially those who are particularly sensitive to price discovery and trading costs. ETFs often deliver better outcomes for these investors than baskets of individual securities.”
[1] Spreads for all 91 Vanguard ETFs and their baskets of underlying securities are as of April 11, 2025.
[2] Certain funds may apply a fair value pricing methodology that will set the NAV at different levels than the underlying securities’ official closing value.
Notes:
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