Last Updated: 31 January 2023
In a recent feature we covered the different ways in which institutional investors can trade in ETFs. According to Laurent Kssis of market maker LaBranche, larger investors can trade on-exchange, over-the-counter, at the closing stock exchange auction and at the fund’s net asset value (NAV).
Retail investors, in contrast, are generally restricted to trading at the prices their stockbrokers quote. Brokers’ ETF quotes are derived, in turn, from the prices that specialist market makers show “on-screen”. While db x-trackers has recently introduced the facility to trade at NAV in smaller dealing sizes for all its UK-listed ETFs (a useful option, since it removes half the bid-offer spread that an investor typically faces), none of the brokers we surveyed yet offers this facility to its UK retail clients.
Nevertheless, there is still a wide range of dealing options available to investors through the use of stop and limit orders (more on this below).
The firms we surveyed say that most investors trade in ETFs using brokers’ “quote and deal” trading systems, whereby you enter the code or name of the ETF you wish to buy or sell, obtain an online price, and are given a window of 10-25 seconds (depending on the firm) to deal.
Limit orders, which are accepted by all the firms we surveyed, allow the investor to deal only if an ETF’s price breaches a pre-determined level, and are typically set for the day’s trading session, or “good till cancelled”. Stop orders can be used to exit an existing position at a fixed price or, if set on a trailing basis, at a given percentage margin from the ETF’s current price. Limit and stop orders are a useful way of controlling risk and trading in a disciplined way, particularly since one of the main attractions of ETFs is the facility to trade in them throughout the day. However, it’s worth remembering an old adage – “in at limit, out at market”. In other words, it’s good to use limit orders to enter a position, but once you’ve decided to get out, do so at the best quoted price.
If you use one of the ultra-cheap savings plan options for buying ETFs that we highlighted in the table, you will of course lose the ability to time your investment. One broker we spoke to said that his firm amalgamates the orders it receives of this type and buys the relevant funds on the first and third Wednesdays of each month. The time of day at which your purchase order is filled will be entirely up to the broker.
None of the brokers in the survey currently offers the facility to sell ETFs short, in contrast to in the US ETF market where this is very easily done. However, Halifax Share Dealing and TD Waterhouse both highlight the possibility of using their CFD (contracts for difference) or financial spread betting services if you want to take a bearish view.
Finally, it’s worth trying to time your ETF purchase or sale to coincide with the opening hours of the underlying market. For ETFs investing in Asian equities, this means that trading liquidity will be best in the morning (European time), whereas the European afternoon should be better for trading in US equity ETFs. Commodity exchanges’ trading hours vary significantly, depending on the underlying raw material.
The ETF revolution and the proliferation of cheap online stockbroking services mean that there is now unparalleled choice for individual investors. The unbundling of the investment and transaction functions also signifies that a certain amount of fact-finding and service provider comparison is necessary. It’s worth paying full attention to the cost of broking services and to associated administration charges. All in all though, there has never been a better time to do it yourself.