How to get the most value from ETFs
The gap between the buying prices of exchange-traded funds (ETFs) and their intrinsic values grew during August's volatile trading. So what can you do to avoid getting a bad deal on your ETFs? Paul Amery explains.

Australia's financial regulator, the ASIC, has some useful guidelines for retail investors in exchange-traded funds (ETFs) on its consumer finance website, Money Smart (Moneysmart.gov.au). These outline some basic due diligence that anyone thinking of buying an ETF should follow.
One risk that ASIC notes is the possibility of price gapping'. This is the risk that an order to buy or sell an ETF is executed at a price that's some distance from the fund's intrinsic value. Given that a key advertised attraction of ETFs is their smaller management fees, it makes little sense to cut costs in one way, then risk giving up those savings by getting a bad purchase or sale price.
The risk of doing so is real, unfortunately. Data from the London Stock Exchange show that the average bid-offer spread (the difference between a fund's selling and buying prices) for ETF trades rose during August's market sell-off to more than 2%, more than three times the level in July, and well over the average ETF fee.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
In some cases average spreads even hit double-digit levels, although that may have been skewed by periods of high volatility when ETF market-makers stopped quoting prices altogether.
The risk of getting a bad dealing price may not be so acute in the most popular products, such as iShares' FTSE 100 tracker (ISF) or ETF Securities' Physical Gold ETC (PHAU). These typically command a spread of under 0.1%.
But for many ETFs offering exposure to less liquid sectors emerging markets indices, global theme-based benchmarks, and leveraged indices seem to feature prominently among the trackers with high trading costs there's more to worry about.
So what should you do? First, check stock exchanges' websites for historical bid-offer spread data, looking at how funds have traded during more and less volatile market periods. Second, choose funds that have multiple official market-makers, which should help ensure better liquidity.
Third, try to find a live price feed that gives the ETF's indicative net asset value (or iNAV), which represents an updated, intraday measure of intrinsic value. Finally, try to use limit orders (where you stipulate a specific buying price), especially when entering a new position. By doing so, you can control costs and make sure you buy a fund on your terms.
Paul Amery edits www.indexuniverse.eu , the top source of news and analyses on Europe's ETF and index-fund market.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.
-
8 of the best houses for sale with home cinemas
Houses for sale with home cinemas – from a modern oast-house style property in Kent to a house in Buckinghamshire with Dolby sound and bespoke seating
By Natasha Langan Published
-
Rachel Reeves faces £23 billion capital gains tax “black hole” – will she be forced to look elsewhere?
The fiscal watchdog has downgraded its forecast for capital gains tax revenues, leaving chancellor Rachel Reeves with £23 billion less than previously expected
By Katie Williams Published