10 Things You Probably Didn’t Know About Buying And Selling ETFs – It Is Nothing Like Buying A Mutual Fund
ETFs or Exchange Traded Funds are considered among the most valuable products being created for the individual investors in recent times. There are many benefits often associated with ETFs and if you are able to use these funds wisely, they can help you achieve your investment goals quite easily.
Basically, it’s a marketable security which can be bought or sold via a brokerage on stock exchange. You can find ETFs on almost all the conceivable asset classes be it traditional investments or so-called alternative assets such as currencies and commodities. Besides, ETFs are not like the mutual funds and there are quite a few things that you should know before actually investing in an ETF. Let’s get some insights into buying and selling of ETFs and explore 10 things that you might not have known already.
- Trade Carefully In A Volatile Market
When the market is extremely uncertain and volatile, it’s highly likely for it to experience major intra-day swings. In uncertain times, the bid-ask spreads are widened and it can potentially detract from the returns. It is also important for the ETF investors to carefully avoid twenty minutes at the beginning of a trading day as well as at its end. This is the time when market is particularly volatile because the bid-ask spreads can be negatively affected by supply adjustments and settlements.
- Keep An Eye On Economic And Political Announcements
Markets tend to be unpredictable in short term which means major economic announcements can lead to massive fluctuations in the securities values. As a result, bid-ask spreads can see a potential increase. Similarly, market is quite volatile in times immediately preceded by the significant geopolitical events.
- Trading On The Foreign Holidays Can Have An Impact
There are quite a few Canadian-listed ETFs that hold the US securities. Such securities are traded on all the working days of Canadian exchange, even when underlying securities aren’t trading because of some local holiday. However, the bid-ask spreads can be expected to increase during such times as underlying securities are not trading.
- Prefer Limit Orders Over The Market Orders
The limit orders allow investors to determine the price for buying or selling the ETF units. They also help ensure investors don’t end up paying more or getting less than the pre-set price. These orders are known to prefer price over execution speed.
On the contrary, market orders are usually executed at a price prevailing in the market. Price you get is ‘best available’ at that particular time but always remember that it may change quickly due to the liquidity changes and a change in market volatility. These orders are known to prefer execution speed over price.
- Trade ETFs Offering International Exposure Earlier In The Day
Typically, you should be trading ETFs that offer international exposure when underlying markets are open as it can help minimize volatility. As the values of ETF depend on prices of the underlying securities, tighter bid-ask spreads are observed in morning hours when local markets are still trading those underlying securities.
- Level Of Assets
For making a viable investment, you should opt for ETFs that have a certain minimum level of assets. Generally, common threshold should be set at $10 million at least. Any ETF with asset level below that threshold can be expected to have quite limited interest from investor.
- Fees Is Important
A major reason why people go with ETFs is that it’s a low cost alternative. But even though they’re cheaper compared to other similar investment options, a few ETFs can be really pricey. So, it is important that the investors must pay attention towards the operating expense ratio of the ETF as well as its trading commissions to make a fair comparison. The average ratio of expense on ETF is quoted at 0.44% by Wall Street Journal. The ETFs investing in more focused and risky industries, investments or regions tend to cost more compared to this average figure. In addition, there are some brokers who charge a certain commission for buying an ETF. This cost can be avoided, however, by choosing brokers who do not charge any such fee for buying or selling shares. You should also keep an eye on the fine print as well because, sometimes, the free trades might not actually be free.
- Never Overlook The Tracking Differences
When it comes to index funds, they’re designed for mirroring the return of a particular benchmark – tracking error is a measure of deviation of the fund from that particular benchmark. The ‘Mistracking’ of benchmark can quickly have an overwhelming effect on 1-basis-point expense ratio advantage. It can happen fund manager isn’t able to match the sector exposure which is a major characteristic of benchmark of a fund.
- Trading Activity
It is also important for the investors to ensure that their chosen ETF is traded in ample volume daily. Some ETFs tend to have too little trade whereas the trading volume for some of most popular ETFs goes as high as millions of shares every day. Trading volume is a great indicator of an ETF’s liquidity. Generally speaking, the higher the trading volume of an ETF, the more likely it is to be liquid and the bid-ask spread will be tighter accordingly as well.
- Underlying Asset OR Index
Yet another significant factor that should be taken into consideration is the underlying asset or index that forms the basis of the ETFs. Knowing how important diversification is, it’s preferable to go for ETFs based on board, followed index rather than choosing an obscure index with narrow industry or geographic focus.
So, there are quite a few factors that should be taken into consideration before you start buying and selling ETFs. Take the ones mentioned above into account and you’re up for a perfectly profitable investment opportunity.