Exchange traded funds (ETFs) share a lot of similarities with mutual funds, but trade like stocks. They are a diversified, low-cost and tax-efficient way to invest. Discovering how to trade allows you to take advantage of price movements and seek the best execution.
Closing Price vs. Net Asset Value (NAV): ETFs are traded on the exchange during the day, so their price fluctuates with the market supply and demand, just like stocks and other intraday traded securities. The NAV 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.
Liquidity is not limited to what you see on-screen/on exchange: ETFs are as liquid as their underlying market. Unlike individual stocks, which usually have a fixed supply of shares in circulation on the secondary market, ETFs have an open-ended structure and can be created/redeemed based on investor supply and demand.
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. Below are our top tips.
Always use a limit order. When buying on an exchange, limit orders provide better price control, consider using limit or stop-limit orders (especially in volatile markets).
Try to trade when the underlying market is also trading. For Hong Kong investors, it may be the case that the underlying market is closed. 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.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Diversification does not ensure a profit or guarantee against loss.
There can be no assurance that a liquid market will be maintained for ETF shares
The views expressed in this material are the views of Capital Markets Team through the period ended 31 July 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
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