5 tips for trading Active ETFs
Exchange traded funds can be bought and sold like any share on an exchange (such as the ASX), through a full service or online broker. However, there are some trading myths and realities that investors should be aware of, to assist here are 5 top trading tips to keep in mind.
1. Always refer to the “iNAV” when placing an order
One of the benefits of using Active Exchange Traded Funds (Active ETFs) is that you can get an estimate of the “fair value” of the fund at any point during the trading day. This allows you to set your order at an appropriate level, near “fair value”. Active ETF issuers provide a real time indication of net asset value. Because this calculation changes in real time, the calculated number is normally called the “iNAV” – an abbreviation for “indicative net asset value”. For AMP Capital Active ETFs, you can go directly to the AMP Capital website to look up the iNAV or alternatively use an iNAV ASX ticker.
A screenshot showing a live iNAV of GLIN - the AMP Capital Global Infrastructure Securities Fund (Unhedged) (Managed Fund)
2. Always use a limit order
When placing a buy or sell order, it is recommended that you use a “limit order” instead of a “market order”. This will ensure you are being filled at the price you have chosen after looking at the iNAV. Because underlying markets are moving throughout the day, the iNAV can change very quickly especially in volatile markets. When the iNAV changes, the bid/offer prices change with it and by using a market order, you risk getting filled at the price that the bid/offer has changed to. If spreads are very tight, this may be OK. But in volatile markets, spreads tend to widen and you may get filled at an unusually wide spread. You may also run into a situation where a large order gets filled before yours, wiping out the first price level, which means your shares may get filled at the next price level further away from the iNAV.
To ensure you get the price that you want, always use limit orders.
Example of a limit order being placed for GLIN – the AMP Capital Global Infrastructure Securities Fund (Unhedged) (Managed Fund)
3. Be aware of the underlying market’s trading hours
One of the determinants of Active ETF bid/offer spreads is the underlying market exposure. For example, if the underlying market is volatile, spreads may be wider than usual. If the underlying market is currently not trading, the fund as market maker will have to widen the spread to account for that. When trading in the Australian market, it is possible that the underlying will never be open (for example: US markets), so you may not have a choice. But if you do have the option of being able to place a trade when the underlying market is open or not, always try to trade when the underlying market is also trading to ensure the best possible spread is available.
4. Volume on screen is not an indicator for liquidity
Unlike stocks and listed investment companies (LICs), Active ETFs are open-ended, meaning that units can be created and redeemed by the fund manager. This means an Active ETFs can continuously issue new units if assets keep growing.
If an Active ETF hasn’t traded much during the day and you want to purchase or sell units, you can always do so because the fund is acting as market maker on the other side of the trade willing to buy/sell units. This is very different from shares and LICs as with those instruments, shares are being traded between Investor A and Investor B only. With an Active ETF, units can be traded between Investor A and B, or in cases when there is no Investor B, the fund as market maker can be expected to be on screen to buy/sell directly to Investor A. This is an important benefit of Active ETFs .
One other point worth mentioning – if you wanted to buy or sell more units in one trade than what is reflected on screen, we advise that you call the Issuer (BetaShares in the case of the AMP Capital Active ETFs ). They can then contact the fund’s market maker agent to arrange for the amount of units shown on screen to be increased so that you can buy/sell all the units you want in one trade.
Active ETFs are as liquid as their underlying market so if there is low ‘on screen’ volume showing it doesn’t mean it has low liquidity.
Example of a trading screen with limited “on screen” volume. Low “on screen” volume is not reflective of the “true liquidity” of an Active ETFs .
5. The importance of “all in cost” v. management fees
Some investors mistakenly look only at management fees when considering the cost of their investment. All Active ETFs have management fees. This is how a fund manager gets paid, with the quantum of management fees usually corresponding to the level of involvement required by the Fund Manager to run the fund. Importantly, however, investors should look at all-in total cost. An all-in cost of an Active ETF includes the management fee, the “buy-sell” spread and any commission charged by your broker to buy and sell.
As always investors should remember to read the Product Disclosure Statement (PDS) of each Active ETFs prior to investing.
Find out more about AMP Capital's Active ETFs - Learn more here.
About the author
Paul Gambale is Senior Product Owner - Innovation and New Ventures at AMP Capital
Note: adapted from BetaShares Blog article “The Top 6 Tips for Trading ETFs” by Justin Arzadon - 1 July 2014