ETFs can offer you the benefits of transparency, lower costs, and increased intra-day trading capabilities.
Here are some tips you should bear in mind when employing ETFs to make use of these products as effectively as possible, and to ensure successful, cost-effective execution.
Exchange traded funds (ETFs) are investment funds that trade just like stocks. Their unique structure means they can offer you the benefits of transparency, lower costs, and increased intra-day trading capabilities.
We believe that in order to make use of these products as effectively as possible and to ensure successful, cost-effective execution, there are a number of considerations that you should bear in mind when employing ETFs. We share our top tips below.
Understand the distinction between the closing price and Net Asset Value (NAV) for valuation purposes. The closing price is the last price of the trading day, influenced by supply and demand. The NAV is calculated by the standard methodology in the Product Disclosure Statement (PDS) and is calculated based on the underlying securities’ closing prices. Hence the ETF’s closing price could diverge from the official NAV and is therefore not the official valuation of the ETF.
Always be conscious that an ETF’s liquidity is not limited to on-screen/on exchange representation. ETFs are as liquid as their underlying market. They have an open-ended structure, which means that units can be created and/or redeemed by the fund manager. If an ETF has not traded heavily during the day and you wish to buy or sell units, Market Makers/Authorised Participants help to ensure best available execution. Also, larger size orders can be facilitated by Market Makers/Authorised Participants. Learn more about the role of Market Makers/Authorised Participants for ETF liquidity
Take into account that not all Market Makers can price all ETFs equally. Each has its own specialisation and expertise. Always contact more than one Market Maker for an Over the Counter (OTC) transaction to find the best price.
Always use a limit order. When buying on an exchange, limit orders provide better price control and should normally be used in preference to market orders.
Try to trade when the underlying market is also trading. When trading in the Australian market, it may be the case that the underlying market is not open, for example US equity markets. So when buying an ETF where part or all of the underlying security’s market is closed, it is best to time the execution when a maximum of the underlying securities trade. All else being equal, this may help having lower bid-ask spreads at this point.
Try to avoid trading in the first and last 10 minutes of the trading day. When markets are opening and closing, there is generally more volatility in prices, and as a result wider market makers’ spreads.
Open, close and auction periods are often governed by specific rules. It is prudent to familiarise yourself with these rules. Placing a trade during these periods should generally be avoided unless the investor anticipating the trade is comfortable with those rules.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.