Exchange-Traded Funds (ETFs) have existed as we know them since 1993, when State Street Global Advisors launched the S&P 500 Trust ETF (SPY), still one of the most widely traded ETFs today.
According to the Investment Company Institute website, there was roughly $3.6 Trillion of total ETF AUM as of March 30, 2020. Despite their widespread adoption and given the vast array of tools that facilitate portfolio rebalancing for investors and advisors, there are still many potential pitfalls when executing ETF trades that we would like to help you avoid.
With the goal of providing the best outcomes possible, we have created a collection of ETF trading do’s and don’ts. And while we understand it can be impractical or impossible to follow all of them all of the time, implementing as many as you can may lead to more optimal results for your clients. For advisors who do not have the capacity to account for all of these suggestions, outsourcing your trading operations or using open-end mutual funds may be prudent and effective ways to implement client portfolios.
DON’T select ETFs simply based on one characteristic such as the exposure they provide (e.g. the index/sector/factor they track) or the reputation of its sponsor / manager alone.DON’T trade at the open or close of day. At the open, especially on Mondays, markets are digesting overnight (or the weekend’s) news into prices, so volatility can be elevated. Also, some of the underlying securities may not have begun trading yet. At the end of the trading day, market makers may begin to limit their risk. Either scenario can lead to wider spreads and less-advantageous conditions for the ETF investor.
DON’T place a trade when the market the ETF trades on is closed. This is common with underlying securities traded in global exchanges. Your order will be executed upon market open. See above regarding trading at the open.
DON’T trade around major Federal Reserve Board announcements or meeting dates, earnings announcements by large constituents of the ETF, or other important news that can lead to volatility.
DON’T trade on particularly volatile days if you can help it.
DON’T trade on benchmark reconstitution or rebalancing dates.
DON’T blindly use market orders unless guaranteed execution is more important than the price received for the trade.
About the Mardio Nardone, CFA
Mario began his investment career in 1999 with Vanguard mutual funds in Valley Forge, PA, where he consulted institutions and financial advisors on investment policy, portfolio construction, and Exchange-Traded Funds (ETFs). He also held roles as a research analyst, a municipal bond fund specialist, among others during his tenure. In 2003 he earned the Chartered Financial Analyst designation, and he continues to mentor aspiring Charter candidates and young investment professionals.
Mario relocated to Charleston in 2010 to serve as Chief Investment Officer for a financial planning firm before establishing East Bay, the collaborative partner firm of (insert firm name), in 2014. As a Partner at East Bay, Mario serves a select group of Registered Investment Advisor firms as their outsourced Chief Investment Strategist. Responsibilities of this role include continuous oversight of advisor clients’ investments, bespoke strategies for unique situations, client communications, and more.
Mario is Past President of CFA Society South Carolina and Former Chairman of the College of Charleston Finance Department Advisory Board. His approach to investments and the industry has been featured in Investment News, NAPFA Advisor Magazine, South Carolina Public Radio, and other publications and media outlets.
Mario enjoys early morning basketball games, the Charleston beaches and restaurant scene, and spending summers in coastal Maine. He is an avid world traveler and SCUBA diver, but also enjoys the simpler joys of life with his wife Piper, their daughter Pepper, and son Santino.
Learn more and connect with Mario on LinkedIn.
Sources
Disclosures
East Bay Financial Services, LLC, a Registered Investment Advisory firm, supplies investment research services under contract.
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