BMO Canadian ETF Dashboard

— as of April 30, 2020 —

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Best Practices for Trading ETFs in Every Climate

Mark Raes

Best Practices for Trading ETFs in Every Climate

Snapshot

COVID-19, combined with the energy shock from competing major oil-producing nations, has led to a period of heightened market volatility and swing investor sentiment. Advisors and investors have recognized the trading efficiency of ETFs, using them as single-ticket solutions to help reposition portfolios, quickly respond to volatile markets and take advantage of price dislocations for clients.

At the same time, we have seen wider spreads on certain ETFs, which speaks to the liquidity of the underlying holdings. That is why it’s more important than ever to be aware of market conditions – and underlying exposures – that could impact your trading activity when buying or selling ETFs. As your dedicated partner, BMO ETFs has created a list of best practices to help you succeed in any climate. From trading when the underlying market is open to always using limit orders, these trading tips will ensure you’re implementing ETFs effectively to enhance portfolio construction.

Benefits

  • Mature ETFs enhance the liquidity of the underlying holdings
  • Effective trading with established investor interest
  • Disciplined portfolio construction
  • Broad exposures instead of a subset of holdings

Trade Idea - Four Essential ETF Trading Tips

Avoid Trading at the Open and Close of the Market
With so much new information processed overnight, from COVID-19 updates and government responses to Asian and European market activity, it’s critical to avoid trading in the first ten minutes of the day. The market price of an ETF is a reflection of the underlying portfolio’s value, so allowing time for those securities to trade improves trading on the ETF, as this removes uncertainty in its market quotes. Similarly, minimize trading in the last 10 minutes to close, as underlying portfolio movement can be volatile toward the end of the day.

Always Use Limit Orders
As with trading equities, many order types are available for use. The entry or exit trading price will impact the trade’s overall profitability. As underlying market levels continue to move while a trade is being placed, a limit order can ensure a desired price on the trade.. Using limit orders has become even more important in this environment to ensure no surprise by market fills, and a smooth overall client experience. With markets moving quickly, it is also important to keep re-visiting those limit orders over the course of the day as prices shift, and a trade may need to be reset. 

Trade When the Underlying Market is Open
The underwriter will always be able to keep a tighter spread on the ETF’s price when the underlying portfolio is trading. However, when the underlying market is closed, the underwriter will have to model the price, and will therefore set a slightly wider spread to reflect their increased risk on the trade. Where possible, for international ETFs, trade when the underlying market is open and keep in mind that Canadian holidays differ from other countries.

Be Aware of Market Volatility
During times of high market volatility, bid/ask spreads can widen and change very quickly. It is important to always use limit orders to ensure you get the best price.

Importantly, an ETF is at least as liquid as its underlying securities – regardless of ETF traded volume. It doesn’t matter if the Fund trades one share per day or 2 million. If an investor is putting $100 million into that ETF, execution is based on the underlying assets. BMO ETFs are constructed to have liquid portfolios by establishing traded volume requirements for each security held within.

Understanding-ETF-Liquidity_English-version.jpg#asset:4055

Outlook

Amid the current environment, fixed income has been an area of concern for investors, particularly with corporate bonds. As the underlying bonds trade over-the-counter, and as liquidity has dried up during this trying period, we have seen expanded premiums or discounts comparing bond ETF market prices to net asset values. This is a reflection of stale pricing in the net asset value, and just like in 2008, we are seeing ETFs provide price discovery and better reflect existing market conditions, as they continue to trade openly on the exchange.

Instead of thinking of this pricing dislocation as a problem for ETFs, it should be considered as a core benefit in that it offers a more accurate representation of the market – and most importantly, helps investors trade when they are having difficulty transacting in the underlying bonds.

Overall, we see the benefits of ETFs as twofold during this time of crisis: providing more trading efficiency than the underlying portfolios, and in certain cases, delivering price discovery to challenged asset classes.

 

In this heightened period of uncertainty, we will continue to provide you with timely resources, weekly insights and new ideas to enrich your practice. To learn more, contact your ETF Specialist, or for trading assistance, call 1-877-741-7263.

Mark Raes

Best Practices for Trading ETFs in Every Climate

Snapshot

COVID-19, combined with the energy shock from competing major oil-producing nations, has led to a period of heightened market volatility and swing investor sentiment. Advisors and investors have recognized the trading efficiency of ETFs, using them as single-ticket solutions to help reposition portfolios, quickly respond to volatile markets and take advantage of price dislocations for clients.

At the same time, we have seen wider spreads on certain ETFs, which speaks to the liquidity of the underlying holdings. That is why it’s more important than ever to be aware of market conditions – and underlying exposures – that could impact your trading activity when buying or selling ETFs. As your dedicated partner, BMO ETFs has created a list of best practices to help you succeed in any climate. From trading when the underlying market is open to always using limit orders, these trading tips will ensure you’re implementing ETFs effectively to enhance portfolio construction.

Benefits

  • Mature ETFs enhance the liquidity of the underlying holdings
  • Effective trading with established investor interest
  • Disciplined portfolio construction
  • Broad exposures instead of a subset of holdings

Trade Idea - Four Essential ETF Trading Tips

Avoid Trading at the Open and Close of the Market
With so much new information processed overnight, from COVID-19 updates and government responses to Asian and European market activity, it’s critical to avoid trading in the first ten minutes of the day. The market price of an ETF is a reflection of the underlying portfolio’s value, so allowing time for those securities to trade improves trading on the ETF, as this removes uncertainty in its market quotes. Similarly, minimize trading in the last 10 minutes to close, as underlying portfolio movement can be volatile toward the end of the day.

Always Use Limit Orders
As with trading equities, many order types are available for use. The entry or exit trading price will impact the trade’s overall profitability. As underlying market levels continue to move while a trade is being placed, a limit order can ensure a desired price on the trade.. Using limit orders has become even more important in this environment to ensure no surprise by market fills, and a smooth overall client experience. With markets moving quickly, it is also important to keep re-visiting those limit orders over the course of the day as prices shift, and a trade may need to be reset. 

Trade When the Underlying Market is Open
The underwriter will always be able to keep a tighter spread on the ETF’s price when the underlying portfolio is trading. However, when the underlying market is closed, the underwriter will have to model the price, and will therefore set a slightly wider spread to reflect their increased risk on the trade. Where possible, for international ETFs, trade when the underlying market is open and keep in mind that Canadian holidays differ from other countries.

Be Aware of Market Volatility
During times of high market volatility, bid/ask spreads can widen and change very quickly. It is important to always use limit orders to ensure you get the best price.

Importantly, an ETF is at least as liquid as its underlying securities – regardless of ETF traded volume. It doesn’t matter if the Fund trades one share per day or 2 million. If an investor is putting $100 million into that ETF, execution is based on the underlying assets. BMO ETFs are constructed to have liquid portfolios by establishing traded volume requirements for each security held within.

Understanding-ETF-Liquidity_English-version.jpg#asset:4055

Outlook

Amid the current environment, fixed income has been an area of concern for investors, particularly with corporate bonds. As the underlying bonds trade over-the-counter, and as liquidity has dried up during this trying period, we have seen expanded premiums or discounts comparing bond ETF market prices to net asset values. This is a reflection of stale pricing in the net asset value, and just like in 2008, we are seeing ETFs provide price discovery and better reflect existing market conditions, as they continue to trade openly on the exchange.

Instead of thinking of this pricing dislocation as a problem for ETFs, it should be considered as a core benefit in that it offers a more accurate representation of the market – and most importantly, helps investors trade when they are having difficulty transacting in the underlying bonds.

Overall, we see the benefits of ETFs as twofold during this time of crisis: providing more trading efficiency than the underlying portfolios, and in certain cases, delivering price discovery to challenged asset classes.

 

In this heightened period of uncertainty, we will continue to provide you with timely resources, weekly insights and new ideas to enrich your practice. To learn more, contact your ETF Specialist, or for trading assistance, call 1-877-741-7263.