When trading exchange traded funds (ETFs) for your clients, the name of the game at the end of the day is not just giving them portfolios that perform well, but saving them money while building those portfolios.
There are a few ways you can find the best ETFs for your clients while saving them money, too:
- Look at the expense ratios. Increasingly, there are multiple ETFs that represent a particular sector or asset class. This has been great for investors in that it has fostered more competition on price. Use that to your advantage and look for funds that are competitive in their pricing. You can sort ETFs by expense ratio on the ETF Analyzer. As a pro subscriber, you can also build portfolios on our site and see the total cost.
- Research your custodian. Trading fees eat into principal, so it’s going to be important to both you and your client that these costs are kept as low as possible. Research different custodians and do some fee and commission structure comparison-shopping.
- Look for liquidity. Although a fund’s trading volume and assets under management aren’t the be-all and end-all, they are important when it comes to keeping costs in check. That’s because funds with light volume and low assets often have a wide bid-ask spread, which means that you could wind up paying more to own such a fund than you would in a more widely traded ETF.
- Watch the bid-ask spread. On that note, no matter what fund you’re trading, whether it’s a high-volume one or a small one, keep an eye on the spread. Heavily traded funds tend to have spreads of a few pennies, while thinly traded ones can see wider spreads. If you need assistance in bringing the spread lower and are placing a large order, consider contacting an alternate liquidity provider for assistance.
- Watch the NAV. Since ETFs are traded on a stock exchange and priced continually, it means that the ETF’s price is constantly shifting. If the price of a fund is lower than its NAV, the ETF is trading at a “discount.” If the price of the fund is higher than its NAV, the ETF is trading at a “premium” – the amount you’re paying is a little more than what the underlying holdings are actually worth. What does this mean? When you’re buying, generally not much. But when you sell, the movement from the discount or premium will affect your overall return.
- Use limit orders. When trading ETFs, use limit orders, which will let you specify the price at which you want to buy or sell. If that price is not reached, then the order doesn’t go through. If you use a market order, the order goes through at the market price – and it may not always be the most advantageous price.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.