subject: Etf Trading Tips (part 2) [print this page] The following is a list of trading tips to help SMSF trustees wanting to get involved with investing in and / or trading ETFs:
1. Avoid placing at-market buy orders before the market opens, as you are likely to get poor prices. Thats because market makers have a hard time pricing an ETF before the market has opened for at least 10 minutes or so as it takes that long to get valid market prices for all the stocks within an ETF. The same holds true near the markets close. The best times to buy ETFs are when the market is being actively traded in the middle part of most days.
2. Dont be scared by apparent low volumes for sale/offer for some ETFs listed though, say, on online broker. The mid-point of the best buy/sell prices offered by the market makers should generally reflect the net asset value of the stocks underpinning an ETF.
3. If you want to buy a large parcel of one ETF, and volumes on offer seem low, dont buy all at once with a large market order as you could again get a poor price (youll hit the first offer and then your order will cascade through to higher priced offers until your order is filled). Instead, stagger your purchase by buying up whats on offer at the best current market prices and then wait for the market maker to replenish stock on offer near the same market price (provided the NAV has not changed too much). You could also leave larger limit orders (i.e. a set price) between the bid and offer prices to try and coax out of the market makers a better price. With very large orders of more than $100,000 or so, you could even ring up the ETF issuer and arrange to trade directly with a market maker to ensure good prices.
4. Decide early whether you are a long term investor or trader, and if the latter, dont be spooked by market volatility into selling out your investments rashly. ETFs are easy to trade, but theres a danger that could lead to over trading of an investors core investment portfolio.
5. If you are worried about the market and want to avoid a significant price decline, consider using contracts for difference (CFDs) as an alternative to selling your underlying ETF investments and therefore being subject to capital gains tax on your long-term holding. With a CFD you can short sell the S&P/ASX 200 index, for example, effectively hedging your ETF position without having to sell the latter and realise capital gains in the short term. If the market falls, your short CFD position will increase in value offsetting the paper loss on your ETF holding. But you will then pay capital gains tax on your CFD trading profit that financial year.
6. Be aware that international ETFs such as the ishares S&P 500 ETF are not hedged, meaning their value reflects not just what is happening on Wall Street, but also the gyrations in the Australian dollar. So even if US stocks are rising, the US ETF may not rise by the same amount if the Australian dollar is at the same time also rising. Over time, this can help reduce a portfolios volatility, as the Australian dollar tends to move inversely with global stock market performance.
David Bassanese is Managing Director of ETF researcher, PennyWise Investment. If you would like a free four-week trial of PennyWise ETF Investment Research, please consult www.pennywiseinvestment.com.au.
Important note: While every care has been taken in the preparation of this document, Webfriends Pty Ltd trading as PennyWise Investment (ABN 11 117 305 629) (AFSL 329 027) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.
