One key advantage of exchange-traded funds (ETFs) is that they can be traded throughout the day. However, there are a few tricks that every smaller investor should know to get the best deal when trading one. After all, it makes no sense to save on costs with low fees only to give this up by losing too much in other ways.
First, remember that the liquidity of ETFs varies with the liquidity of the underlying market they track. So if you're buying an ETF tracking US shares, it makes sense to place your trade after the New York stock exchange opens (at 2.30 pm UK time), rather than outside US trading hours when you won't get such a good price. Other markets' opening times vary, particularly in commodities, so check before placing a trade.
Second, because ETFs are quoted like shares, they can be traded in different ways. Most UK retail investors use online stockbrokers' "quote and deal" service, where a quoted buying or selling price is held for 10-25 seconds, allowing you to decide to trade or not at that price. You can also use stop and limit orders (instructions to buy or sell at a pre-set price), which are a good way of controlling risk and trading on your own terms. But you should always keep in mind the adage "in at limit, out at market". If you want to get out, take the market price.
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However, due to a quirk of the UK market, almost all retail-investor trades pass through retail service providers (RSPs), intermediaries between online stockbrokers and the wholesale market. Depending on how many RSPs your broker polls when you place an order, you may not get the best available price. And limit orders left with an RSP aren't automatically displayed to the market.
The solution is to use a broker that offers direct market access (DMA), such as Interactive Brokers and iDealing. DMA places your order into the London Stock Exchange's order book, displaying your limit orders to the market and setting your own price, rather than simply taking the price offered by the RSP.
Paul Amery is editor of www.indexuniverse.eu
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