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Written by Paul Amery
- June 09, 2009 09:38 AM
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Related ETFs:
LQD
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Page 3 of 3
How To Trade?
Investors can choose between a variety of routes when placing an ETF trade. Institutions can execute an order by trading at the prices that the market makers quote on screen they can enlist the services of a broking firm, or they can call the market makers directly to trade “over the counter”.
European retail investors will have to trade with a stockbroker or trading firm in their own country, whose ETF prices will be set by the wholesale market, probably with a slight mark-up in price. Their orders will be amalgamated by the broker and end up as an exchange transaction, or a trade with one of the OTC market makers. For larger, institutional trades, it is also common to place an order to buy or sell an ETF at the official end-of-day NAV. This route is a trade-off between cost (lower, since the trade is executed at the mid-market price) and the market risk that the investor takes on between the time of placing the trade order and the market close. This risk can be significant, and in the US some commentators have even blamed (leveraged) ETFs for exacerbating late-day market volatility. As we reported two weeks ago, db x-trackers has recently started to offer the facility to trade at NAV to its smaller clients, albeit subject to a transaction fee.
Summary
A variety of factors—the underlying securities’ liquidity, market opening times, the existence of multiple trading locations, and the way in which an order is given—can affect the way that an ETF is priced in the European secondary market. But whether you’re an active trader or a buy-and-hold ETF investor, understanding how the market operates is key to keeping costs down and putting together a successful portfolio.
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