The Top 6 Tips for Trading ETFs | BetaShares

The Top 6 Tips for Trading ETFs

BY Justin Arzadon | 1 July 2014
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ETFs are becoming an increasingly popular and mainstream investment tool for individual and institutional traders alike. By now, most people know that ETFs can be bought and sold like any share on an exchange (like the ASX), through a full service or online broker. However we often get asked if there is anything else that should be taken into account when trading ETFs.  As a result I thought it might be useful to set out the top 6 tips for trading ETFs, gathered from members of our Broker Trading Desk here at BetaShares.

1.       Always refer to iNav when placing an order

One of the benefits of using ETFs is that you can get an estimate of the “fair value” of the fund at any point during the trading day.  This allows you to set your order at an appropriate level, near “fair value”.  ETF issuers provide a real time indication of net asset value. Because this calculation changes in real time, the calculated number is normally called the “iNAV” – an abbreviation for “indicative net asset value.”. For most of BetaShares ETFs, you can go directly to the website to look up the iNAV or alternatively use an iNAV ASX ticker.

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A screenshot from our website showing a live iNAV of one of our funds

2.       Always use a limit order

When placing a buy or sell order, it is recommended that you use “limit-orders” instead of a “market order”.  This will ensure you are being filled at the price you have chosen after looking at the iNAV.  Because underlying markets are moving throughout the day, the iNAV can change very quickly especially in volatile markets.  When the iNAV changes, the bid/offer prices change with it and by using a market order, you risk getting filled at the price that the bid/offer has changed to.  If spreads are very tight, this may be OK.  But in volatile markets, spreads tend to widen and you may get filled at an unusually wide spread.  You may also run into a situation where a large order gets filled before yours, wiping out the first price level, which means your shares get filled at the next price level further away from the iNAV.

Therefore, to ensure you get the price that you want, always use limit orders.

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Example of a limit order being placed for our YMAX fund

3.       Be aware of the underlying  market’s trading hours

One of the determinants of ETF bid-ask spreads is the underlying market exposure.  For example, if the underlying market is volatile, spreads may be wider than usual.  If the underlying market is currently not trading, then market makers will have to widen the spread to account for that.  When trading in the Australian market, it is possible that the underlying will never be open (for example: US equity markets), so you may not have a choice.  But if you do have the option of being able to place a trade when the underlying market is open or not, always try to trade when the underlying market is also trading to ensure the best possible spread is available.

4.       Volume on screen is not an indicator for liquidity

Unlike stocks and LICs, ETFs are open-ended meaning that units can be created and redeemed by the fund manager.  This means an ETF can continuously issue new units if assets keep growing.

If an ETF hasn’t traded much during the day and you want to purchase or sell units, you can always do so because there is a market maker on the other side of the trade willing to buy/sell those units.  This is very different from shares and LICs as with those instruments, shares are being traded between Investor A and Investor B only.  With an ETF, units can be traded between Investor A and B or in cases when there is no Investor B, then a market maker can be expected to be on screen to buy/sell directly to Investor A.  This is one of the biggest advantages in my opinion to ETFs (albeit one of the least understood!)

One other point worth mentioning – if you wanted to buy or sell more units in one trade than what is reflected on screen, give BetaShares a call and let us know.  We will contact the market maker on your behalf, who will then increase the amount of units shown on screen so that you can buy/sell all the units you want in one trade.

ETFs are as liquid as their underlying market so if an ETF has low ‘on screen’ volume it doesn’t mean it has low liquidity.

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Example of a trading screen with limited ‘on screen’ volume. Low ‘on screen’ volume is not reflective of the ‘true liquidity’ of an ETF.

5.    Avoid trading in the first and last 10 mins of the trading day

During the first and last 10 minutes of a trading day, when markets are opening and closing, in general there’s a lot more volatility in share prices.  While stock prices are moving quickly based on movements in the market, the market maker’s spreads will be wider and the iNAV will be based on a price that can significantly move within a minute or two.  Do yourself a favour and trade the ETF when stocks have settled down, usually 10 minutes after the markets open to 10 minutes before they close.

6.    The importance of ‘all in cost’ v. management fees

Some investors mistakenly look only at management fees when considering the cost of their investment. All ETFs have management fees.  This is how an ETF fund manager gets paid, with the quantum of management fees usually corresponding to the level of involvement required by the Fund Manager to run the fund.  Importantly, however, investors should look at all-in total cost.  An all-in cost of an ETF includes the management fee, the ‘buy-sell’ spread on the ETF and any commission charged to buy and sell.

You should also keep in mind other beneficial features of an ETF structure. For example on our suite of currency hedged commodity products, the investor will benefit from a ‘positive carry’ due to the current interest rate differential between the AUD and USD exposure being tracked.  A management fee may look much higher than an alternative, however based on the structure of the ETF, the fund itself may be earning interest greater than the actual fee resulting in a positive carry.  This is beneficial as some or all of your fees may be “paid for” by other elements of the fund’s investment strategy.

Hopefully these simple tips will help you get the most of our your ETF buys and sells. Happy trading!

14 Comments

  1. herbert  |  July 8, 2014

    Thanks for advice

    1. BetaShares  |  July 9, 2014

      Our pleasure Herbert – glad you’re enjoying our blog

  2. max  |  July 16, 2014

    can you trade betashares ETFs with all brokers? I’ve just opened an account with CommSec, can I buy through this platform? any other that you’d recommend (e.g. for lower fees)?
    tx

    1. BetaShares  |  July 16, 2014

      Max,
      Yes, all BetaShares Funds can be traded on the ASX like any share and therefore can be traded with any broker. Commsec most certainly is fine for this purpose.

      In terms of recommendations, its best to take a look at the pricing that the major brokers provide – the key players in the Australian landscape are Commsec, E*Trade, Westpac Online, NAB Trade and Bell Direct

  3. Hi
    Just wondering how are the management fees paid?
    When I own units in a ETF do I have to pay the management fees? do I get a bill from betashares?
    Or do I LOSE units every yr I hold them? eg. if I own 100 shares than next yr ill only have 99 shares if the management fee is 1% is that how it works?
    how does it work paying the ETF’s management fee as a unit holder?
    thanks.

    1. BetaShares  |  August 27, 2014

      Hi Jake,
      The management fees for ETFs are accrued daily in the net asset value of the fund (in other words, are taking out of the fund’s value on a daily basis). There is no bill nor loss of units. In this way, the management fees of an ETF are the same as all other managed funds

  4. Thanks for the reply, just one more thing, OOO (oil ETF) has been trading since 2011, do you guys at Betashares think (OOO) will be trading for a long time to come, and you think it will just keep growing in value and units etc… or is there a chance (OOO) could get delisted at some stage if little interest in an oil ETF?

    if (OOO) was delisted, because of lack of investor interest or some other reason like that, would every unit holder get paid out the value of their units into their bank account, is this how it would work if OOO was ever delisted?
    ok thanks a lot.

    1. BetaShares  |  August 28, 2014

      Hi again Jake,
      Should an ETF get delisted the process is that the unitholders in the ETF will receive the current value of the holdings (as of the day of delisting) as a cash payment to their nominated bank-account. This is the case for OOO or, for that matter, any other ETF on the market

  5. Steve  |  March 20, 2015

    Liquidity is a claimed advantage for ETF’s. What happens in a GFC-style major event when all the worlds exchanges are swamped with sell orders – are ETF’s going to return my funds no matter what is happening? As a unit trust fundamentally, can the issuer suspend or delay trade – hold my money at will in such events?

    1. BetaShares  |  March 23, 2015

      Hi Steve,
      Thanks for your comments. The liquidity of ETFs is essentially that of the underlying exposures that the ETF is tracking. This means that the ETF liquidity will be at least as good as whatever the underlying is. The PDS of each ETF will provide details of when the issuer is able to suspend ‘applications or redemptions’.

  6. Price of oil and ETF price has declined significantly. Wouldn’t this be a good time to issue more ETFs esp if you think the POO will recover in the near future?

    1. BetaShares  |  December 1, 2015

      Harry,
      We actually have in our suite an ETF that tracks the price of oil via oil futures. The ASX code for this fund is OOO. This can be used by investors who believe the price of oil is likely to increase in the future.

  7. John Mahoney  |  January 27, 2017

    I didn’t realize that when it comes to ETF trading it was better not to trade doing the first or last 10 minutes of the trade day. I can see how making sure you know these tips can help you get the best prices you can. It is important to find the best items and people to buy from to make sure you get the quality you want.

  8. John Ovens  |  February 16, 2019

    Excellent advisory article

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