How to trade ETFs?
Now that you’ve read up on the benefits of ETFs, you may want to start buying some.
If you are a newbie to ETFs, this post will take you through the basic process of buying an ETF.
Just like ordinary shares listed on the ASX, you can buy ETFs through your online broker (ie CommSec, E*TRADE, etc). See our post covering the cheapest brokers to trade ETFs in Australia.
Once you are in your online broking account, you just type in the ASX ticker for the ETF you want to buy - e.g. IOZ for the iShares Australian 200 ETF.
Then you need to decide what type of order you want to place in the market. There are two common ways to “order” / trade ETFs:
1) Market Orders: Buy / sell the ETF at the best available market price right now. You can only use this option when the market is open - i.e. between 10am and 4pm Monday to Friday. This is the most simple option. You are likely to buy / sell the ETFs you want very quickly.
2) Limit Orders: You set the price you are willing to buy / sell the ETF. For example, IOZ is trading at $21.50 and you want to buy. You can say that you will only buy at $21.00. Your trade order may not get executed because there are no sellers willing to sell at your price. If the market moves the other direction, your order may not get fulfilled.
What happens after you place your trade?
The ASX settles on a T+3 basis. This means once the trade happens, you will get your ETF in 3 days. When a “buy" trade is in the system, two things can happen:
1) your broker will buy ETFs that already exist in the market from someone; or
2) your broker will buy ETFs from a Market Marker, who will create new units in the ETF you want to buy.
What to look out for when buying ETFs?
Price vs NAV
The Net Asset Value (NAV) of an ETF is the current market value of the assets owned by the ETF. For example, when IOZ has a NAV of $22.50, it means that the value of the portfolio of 200 stocks owned by IOZ equates to $22.50 per IOZ share.
Clearly, when you buy anything, you don’t want to pay more than what it’s worth. In the case of ETFs, when the market price is higher than the NAV, that is exactly what you are doing. Sometimes an ETF will trade above the NAV. But generally it should be a very small difference between price and NAV.
To check an ETF’s NAV, you can go to the ETF company’s website.
Time of trade
You want to buy an ETF as close to the NAV as possible. The best chance of this happening is to trade the ETF whilst the market for the shares that the ETF tracks is open.
For example, when you want to buy IOZ. It tracks the Australian stock market. You should trade IOZ between 10am to 4pm when the ASX is open.
If you want to trade UBJ - tracks the Japanese stock market. You want to trade it from 11am since the Japanese stock market opens at 9am Japan time (or 11am AEST).
This gets difficult with US stocks. The US market is only open when the ASX is not open. In this instance, you won’t have an effective way to track the ETF’s NAV.