3 rules for trading in an ETF

Two weeks ago the InvestSMART Ethical Share Fund (ASX:INES) listed on the ASX and we’ve had a few questions on how to best transact on exchange quoted funds and ETFs (exchange traded funds) in general.

Here are our top three rules for making sure you pay the right price for an ETF.

It’s best not to transact at market open and close

Relax for fifteen minutes or so at the market open. Give it time for the underlying holdings in the ETF to get their prices set and the net asset value of the fund to reflect this.

The bids and offers can be wide at this point, so a market order could end up buying at much higher than net asset value.

Some market makers are there from the second the market opens but the ASX listing rules require a market maker to be in the market for 80 per cent of the day's trade.

It is best to wait until after the first 15 minutes and the same goes for the end of the day. Consider an ETF open for business between 10:15 am and 3:45 pm.

Check the iNAV on the ETF issuers page

The price displayed on your share trading account or the ASX website is not the net asset value. The price only updates on trading platforms when transacted so the price shown could be from the last hour, or even a couple of days ago.

ETF issuers are required to post the ETF’s iNAV (indicative net asset value) on their websites. Timing of the updates vary but most will update every minute if not more regularly.

For example, you can see the iNAV and the time it was last updated for INES here under key details.

Remember to take into consideration the buy/sell spread. An ETF just like a managed fund has three prices.

The NAV, the buy price and the sell price. The buy and sell prices sit a fraction above and below the NAV. This is where the market maker will be. In the case of INES, it is one cent above and below NAV.

Use a limit order

When transacting you can choose between a price limit order or an at market order. For ETFs choose a price limit order. This means you are saying what price you wish to transact at and will only execute at that price.

If you place a transaction using a market order you run the risk of transacting on an order at a price above or below the NAV.

For example, NAV is $2.50 and the market maker is at $2.51 with 100,000 units and someone has placed a sell order at $2.60. You place a market order to buy 125,000 units. 100,00 will be filled at $2.51 and the remainder will be filled at $2.60, well above the ETFs NAV. You don’t want this.   

And remember, don’t leave your order overnight. If international markets have a substantial move overnight you could be paying too much (or selling for too low a price).

If in doubt, get in touch with the ETF issuer.