Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 214

Five things to know before you invest in ETFs

With the Australian Exchange Traded Fund (ETF) industry just shy of $30 billion in assets and ETFs more actively traded than stocks in the US, investors are increasingly adopting ETFs as core building blocks of their portfolios. This trend is set to continue as exchange traded products have evolved from being only index-tracking strategies, and they now also provide a simple way to add exposure to particular asset classes such as gold. They can be used as a tool in a specific strategy, such as taking sharemarket exposure but with reduced market volatility. ETFs are low-cost, offer instant diversification and investment transparency.

The below five tips may help beginner ETF investors.

1. Understand the basic structure and liquidity

Unlike shares, the size of the ETF in terms of assets under management, the daily volume traded and the volume of units quoted ‘on screen’ is not indicative of an ETF’s liquidity.

An ETF’s open-ended structure means units of an ETF can be created or redeemed by market makers, in contrast to company shares which have a fixed amount of stock outstanding on any given day. The supply on offer for an ETF can be adjusted to cater to the demand. Therefore, the ETF fund size, daily volume traded and ‘on screen’ liquidity are not meaningful when assessing the liquidity of an ETF. An ETF’s liquidity is mainly determined by the liquidity of the underlying holdings of the fund. This is demonstrated in the example below, in which the daily liquidity is reflected by the daily average volume of the underlying holdings for BetaShares FTSE RAFI Australia 200 ETF (QOZ). Note onscreen liquidity is in millions while the underlying market is in billions:

ETF investors and liquidity

ETF investors and liquidity

2. Use the indicative Net Asset Value (iNAV) to determine the price to trade

To help determine a fair price to buy or sell an ETF, investors should refer to its indicative net asset value or ‘iNAV’ (if available). The iNAV is the estimated intra-day ‘fair value’ of the ETF (which is the price per unit of the basket of underlying securities held by that particular ETF less any liabilities such as management fees), which updates regularly. INAVs bring intra-day pricing transparency to ETFs in contrast to unlisted managed funds, for which net asset values are determined daily (or sometimes less frequently) once the trading day ends.

INAVs can be found on the website or on the respective product page of the issuer.

3. Understanding bid and offer spreads

All exchange traded and unlisted investment funds are subject to bid and offer spreads (known as buy/sell spreads for unlisted funds). In the case of ETFs, a bid/offer spread is the difference between the NAV of the ETF and the price at which the ETF can be bought or sold on the ASX. A ‘spread’ is a market maker’s compensation for the time and financial risk they bear to make markets and enhance liquidity i.e. acting as a buyer and seller of ETF units on the exchange and creating and redeeming units based on investor demand.

Spreads for each ETF vary as they are largely dependent on liquidity of the underlying securities. In general, the more liquid the security, the tighter the spread. Market makers also seek to maintain tight spreads to ensure they do not give their competition the potential to arbitrage profits.

4. Know the difference between ‘market orders’ and ‘limit orders’

When placing an order through a broker, whether it is for a share or an ETF, there is the choice to place the trade as a ‘market order’, agreeing to buy or sell at whatever price the market demands, or a ‘limit order’ at a specific price.

The risk with the market order is that there may be many orders placed at the same time relative to the demand on offer. For example, a previous investor may have placed a large order which momentarily depletes the volume offered at the current market price. The trade runs the risk of being filled with the next best market bid and this may be worse than the best price possible. A volatile market may also cause the iNAV of the ETF to fluctuate and spreads to widen, which also may lead to bids being filled at undesirable prices.

Placing a ‘limit order’ will avoid this risk. Although the order may not be filled immediately, there is no risk of getting worse than your desired price for the ETF.

5. Time when you buy or sell

ETF investors may also wish to avoid trading near the market open and close. This is because market makers can experience higher risk at these times, which may result in wider than normal spreads. At the market open, market makers look to determine the accurate pricing of the ETF’s underlying securities, taking into account the fact that only some, but not all, of the securities, have commenced trading and therefore have current prices available. This occurs as companies commence trading on the exchange in tranches on a staggered basis, as shown in the diagram below:

ETF investors

Source: MarketIndex.com.au – how to buy shares

Market makers experience higher risk when markets open and near market closing time, as prices of securities tend to fluctuate more. This volatility occurs especially around the market close as the ‘matching period’ approaches. That is, all trades that take place on the close transact at a price determined by the market. The higher risk in pricing at this point may lead to wider than normal spreads.

Buying and selling ETFs on market is straightforward and an application form is not required. ETFs can be simply bought and sold through a broker as with any share on the ASX.

 

Aditi Grover is a Business Development Associate at BetaShares, a sponsor of Cuffelinks. This article is general information and does not address the needs of any individual.

RELATED ARTICLES

The simplicity of this investing method hides its power

The challenges of building a lazy portfolio

Global ETFs: insights into a multi-trillion-dollar industry

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.