ETF Trading 301

Financial Advisor magazine, via fa-mag.com, published a column by Stoyan Bojinov, a contributor to ETF database and etfdb.com.  In it he details three trading tips that ought to allow any advisor (or investor, for that matter) to improve trading results and lower trading costs.

1. When trading international funds, trade when the market for the underlying assets is open.  This increases the accuracy of the NAV quote, and improves the quality of the ETF quote in relation to the NAV.
2. Use limit orders to trade inside the spread.  the advice on ETFs has long been to trade only with limit orders.  This is suggested to avoid suffering severe haircuts that occur when electronic order systems encounter those moments when market makers are absent. Well, exchange traded funds also tend to have wider spreads than other securities with similar volume.  Placing a limit order inside the spread may entice a market maker to fill your order, and the with the cost being the potential for a few minutes delay and a few cents adverse movement in the price.
3. Inquire into upcoming distributions.  As Mr. Bokinov notes., ETFs are by their nature tax efficient.  However, some funds, notably leveraged and inverse ETFs, conduct a lot of trading in order to maintain the expected exposures.  This trading can lead to significant distributions.  As with traditional open-ended funds, it may make sense to defer a purchase or accelerate a sale in the face of an imminent dividend.

These tips are valuable reminders that a little bit of planning can create value for a client in even the most mundane task in the investment process.