Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 143

Ten rules for more effective ETF investing

A number of exchange-traded funds (ETFs) traded at substantial discounts to net asset values (NAVs) during bouts of substantial volatility in late 2015 in the United States and Chinese share markets. While funds' prices quickly snapped back and came into alignment with their underlying NAVs and the trading anomalies were short-lived, it was a reminder of the need for caution in ETF trading in tumultuous markets.

We haven’t seen anything like those disparities in Australian-listed ETFs, but it is worth revisiting some rules of thumb for transacting in ETFs which, if followed, should reduce the chances of local investors being impacted by such events.

1. Use limit orders rather than market orders

Market orders (ie an order to fill the trade at the best available price) tend to be used when time is of the essence and price is of secondary importance. Investors using market orders want to execute their entire order as soon as possible. For very large, very liquid ETFs that trade contemporaneously with their underlying securities, market orders will likely result in fast execution at a good price.

But there are smaller or less liquid ETFs, and there are also ETFs that trade out of sync with their constituent securities (such as U.S. equity ETFs where there’s no overlap between Australian and U.S. trading hours). Limit orders (ie an order to fill with a specific price limit) will ensure favourable execution from a price perspective. A buy limit order will fetch the buyer a price less than or equal to the limit price, while a sell limit order will transact at a price greater than or equal to the limit price.

2. Avoid trading at open, close, or in the auction period

For ASX-listed ETFs, this means at the very least, avoiding trading earlier than 10:15am or later than 3:45pm. At these times, market-makers may not be watching the market as closely, and some underlying stocks may not be trading, making it more difficult for the market-maker to calculate an accurate price.

3. Be wary of transacting when the underlying securities are not open for trading

With transparent pricing of the underlying stocks, trading volumes should be substantially higher, and bid/ask spreads will typically be lower. For example, trade Asian ETFs in the afternoon, once the Hong Kong, Singapore, and Shanghai exchanges are open.

4. Check the bid/ask spread

If the bid/ask spread is wide, it may indicate that something is amiss, and it might pay to delay your trade or dig further.

5. Check trading volumes and ETF size

An ETF’s on-screen trading volume doesn’t tell the whole story. The liquidity of the underlying assets is arguably more important, because the market-maker can create or redeem ETF shares to balance supply and demand, as long as the underlying market is liquid. However, the size of an ETF and on-screen volume are worth monitoring, particularly for ETFs where the underlying assets trade outside Australian hours.

6. Use the available tools

ETF providers offer tools such as the intraday NAV (iNAV) which can help gauge whether an ETF is trading near its net asset value (NAV). Although there’s no guarantee the iNAV will be an exact representation of the NAV, it’s a useful indicator. Check the iNAV before trading.

7. Apply a common sense check

Ask yourself: is there anything unusual here? Is the ETF price substantially different from the previous day, or even from a few minutes ago? Is the ETF price stable while underlying markets are rising or falling? Are markets going through extraordinary volatility? If so, further research or patience may be required before placing a trade.

8. Be careful about using stop-loss strategies

Stop-loss strategies caused serious problems for some U.S. investors in the recent market turmoil. The U.S. sharemarket gapped downward because of a lack of liquidity at that moment, which triggered stop-loss orders. Because some of these stop-losses were market orders, they were filled at any price available, and with limited liquidity at the time, may have caused an even bigger drop in prices. We advise caution using stop-loss strategies, especially if they’re triggered automatically, or use market orders.

9. If in doubt, contact the ETF provider or market-maker

The ETF provider (or for large investors, the market-maker) can answer questions about trading an ETF and explain anomalies. If in doubt, contact the ETF provider or market-maker before trading.

10. Remember – it’s all about your investment strategy

Investors investing for the long term may have fewer worries when transacting ETFs. If a volatile market causes bid/ask spreads to widen, a long-term investor can be patient, waiting to execute their trade when volatility has subsided. In contrast, a short-term trader may be forced to exit a trade quickly, no matter what the cost. Nevertheless, if an ETF doesn’t help you achieve your investment goals and strategy, or fit with your tolerance for risk and investment time horizon, then it’s unlikely to be the best fit for you, no matter how attractive an investment proposition it seems.

 

Alex Prineas is a Research Analysts at Morningstar. This article is general information and does not consider the investment needs of any individual.

 

  •   18 February 2016
  • 2
  •      
  •   

RELATED ARTICLES

Is Magellan's listed fund a game changer?

Will ETF liquidity be there when I need it?

Four options for an income investor’s next dollar

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Latest Updates

Retirement

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Investing

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Shares

The role of shareholder yield in a portfolio

Investors may be overlooking a timeless source of returns in a volatile market. The companies that consistently generate and return cash to shareholders have often proved remarkably resilient through uncertainty.

Shares

Australian inflation still well above the RBA's target

The RBA has spent more than three decades pursuing its 2%-3% inflation target. But the numbers tell a far more complicated story than the headlines. The results may surprise both its strongest critics and most loyal defenders.

Retirement

Retirement in reality - 5 months in

Retirement planning doesn't end when work does. Five months in, Joanne reflects on retiring at a different time to your spouse, coping with setbacks and the importance of rest. Some lessons only become clear after the fact.

Latest from Morningstar

What 6 key market indicators are telling investors right now

Are markets still expensive? There are the seven key indicators every investor needs to know. From gold and equities to bonds, oil, bitcoin and the US dollar. The data reveals where opportunities and risks may lie for investors today.

Investing

Can you ride the AI bubble without overpaying?

AI may prove as transformative as the internet, but markets are behaving as if success is guaranteed. As capital races towards unprecedented levels, investors should ask whether enthusiasm is getting ahead of reality.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.