Wednesday, February 18, 2009

With ETFs It’s a Trader’s Market

By ETFTrends

The face of exchange traded fund (ETF) investing is changing, as well as the traditional buy-and-hold approach. The reasons are many as states in an article I wrote for Investment News, explaining why the ETF industry is ripe to become a traders’ market.

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The buy-and-hold strategy is in intensive care. But many don’t seem prepared to do away with the idea altogether. In which case, a better strategy may prove to be a tactical overlay model using exchange traded funds in which 60%-70% is buy-and-hold and the remaining 30%-40% is actively traded using the 200-day moving average.

When choosing an ETF, there are many choices, so here are things to consider before jumping in:

Liquidity

Be sure to check numbers before buying, as an ETF that does not have assets will not be as liquid as the larger ones. A good point of reference is $100 million in assets.

Commissions

Be aware of the brokerage fee, as the flexibility of an ETF also comes wit a brokerage fee. Every firm is different in the way commission charges are made.

Average Pricing

When trading the same ETF for multiple accounts, it’s possible that each account could get a different price if the ETF was traded for each individual account. If you do a block trade for the full number of shares you want to buy or sell, then you can allocate the shares to the individual accounts with the same average price. This ensures that all clients will receive the same purchase or sale price.

Limit Orders

When placing a trade, you can put the trade in at market and execute it at whatever the going rate is at the time you submit the order. This allows you to place a cap on what you are willing to pay and keeps your price within a specific range.

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