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Exchange Traded Funds - optimal transactions
Old 11-02-2011, 10:39 AM   #1
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Exchange Traded Funds - optimal transactions

Like many of you, I have a significant portion of my portfolio in exchange traded funds. They are a low cost easy way to own certain categories in my target asset allocation.

But as I buy more ETFs, I am wondering what I should be looking for to make sure I am not paying for more than what I get.

Here is what I look for when selecting a particular ETF that fits in my asset class allocation:

- expense ratio
- average volume
- average bid/ask spread
- turnover ratio
- average discount/premium to NAV

Ideally I want a highly liquid, frequently traded ETF that produces the benefits of low bid/ask spreads and minimal prem/disc to NAV.

After all, it is silly for me to move from a mutual fund with a 0.20% expense ratio to an ETF with a 0.12% ER but pay a 1% premium to NAV in the process (thereby eating up 12 years of the benefit of lower expenses!).

After I have selected one or more ETFs that are optimal (in general), I typically pick the best one based on the current bid/ask spread and discount/prem to NAV.

I know of a few places to see historically what the average disc/prem to NAV is, but what is the best way to see intra-day NAV and compare to current bid/ask prices? Fidelity is the broker I use to buy ETFs, and they have a decent "research" feature that shows real time intra-day NAVs along with current real time quotes. Is this the best way to get real time info on prem/disc to NAV? What are others doing?

This isn't a huge deal if one is buying a couple thousand dollars worth of ETFs, but if I move a big chunk of funds from one ETF or a mutual fund to another ETF, I could be losing many hundreds or thousands by paying an extra 1+% premium to NAV (or selling at a 1+% discount to NAV).

What else are others looking at to make sure you get a good deal on an ETF transaction?
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Old 11-02-2011, 01:11 PM   #2
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I watch real-time Level II quotes for a minute before making trades.

There are some experiences posted on bogleheads such as
Bogleheads • View topic - Limit Orders - How do you determine what limit to set?
and
Bogleheads • View topic - "My first time" (Buying an ETF that is)
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Old 11-02-2011, 02:10 PM   #3
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Quote:
Originally Posted by LOL! View Post
I watch real-time Level II quotes for a minute before making trades.
Thanks for the links, I'll check them out. Where do you get real time L2 quotes? I think Fidelity has these but they are for "active trader pro" account holders, which I don't think I am eligible for since I infrequently trade (maybe 1-2 transactions per month if that).
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Old 11-02-2011, 06:33 PM   #4
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I never completely have trusted the premium/discount stuff. If the bid/ask spread is a penny on decent volume ETF's, isn't that good enough? The intraday (IOV or whatever it's called) is 15 seconds delayed info and I wonder whether one should trust it for useful info. The problem becomes worse if you are trading an international fund (like VEU) when some foreign markets are closed. Probably then one should trade it about a half hour after our markets open.

BTW, usually I am selling one ETF and trying to buy another with the money. I find that navigating the screens in such a situation is time consuming and you may do well or get burned. I talked with a Vanguard broker and she said that I could just have them execute the sell/buy pair. They can do it faster and have multiple screens. If I went with the broker help I'd still be logged on to watch some of the pricing action. There is no broker fee for me.

Comments?

P.S. I try not to do too many trades too.
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Old 11-02-2011, 07:16 PM   #5
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Quote:
Originally Posted by FUEGO View Post
What else are others looking at to make sure you get a good deal on an ETF transaction?
25 Things Every Financial Advisor Should Know About ETFs | ETF Database
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Old 11-02-2011, 07:27 PM   #6
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Welcome back Ron, what made you change your mind?

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Old 11-02-2011, 08:32 PM   #7
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Quote:
Originally Posted by Lsbcal View Post
I never completely have trusted the premium/discount stuff. If the bid/ask spread is a penny on decent volume ETF's, isn't that good enough? The intraday (IOV or whatever it's called) is 15 seconds delayed info and I wonder whether one should trust it for useful info. The problem becomes worse if you are trading an international fund (like VEU) when some foreign markets are closed. Probably then one should trade it about a half hour after our markets open.
I wonder about the IOV too. I have seen precautions that it isn't necessarily the exact prices precisely for the reason you mention, the underlying securities aren't trading on their overseas markets (in the case of international ETFs, which is the majority of what I buy).


Quote:
BTW, usually I am selling one ETF and trying to buy another with the money. I find that navigating the screens in such a situation is time consuming and you may do well or get burned. I talked with a Vanguard broker and she said that I could just have them execute the sell/buy pair. They can do it faster and have multiple screens. If I went with the broker help I'd still be logged on to watch some of the pricing action. There is no broker fee for me.
I have dual monitor set ups and can execute multiple trades near simultaneously (probably a couple seconds apart), since I want to make sure one executes before I enter the second trade (if it is a buy/sell).

And I agree that it isn't quite as big a deal when going from ETF to ETF since the premiums or discounts to NAV seem to run in the same direction (seems like when the market is down, the price is at a discount to NAV, when market is up, price is at prem to NAV).

But I am getting ready to move about 10% of my portfolio from a particular mutual fund to a particular ETF because the mutual fund expense ratio is doubling soon. So I definitely don't want to pay a premium to NAV just to save a few bp's in annual ER.
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Old 11-02-2011, 08:35 PM   #8
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I would add that I also always use a limit price, even if I am setting the limit at the ask price (in case of a buy) or bid price (in case of a sell). I don't want to risk getting some wacky price if I buy at market, or in the case of some lesser liquid etfs with low volume and/or low order books, it isn't that hard to move the market even with smallish trades. Again typically not a big deal if you are trading 100 sh or less, but once you start transacting multiple lots, you are at risk that increases with transaction size if you don't use a limit price.
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Old 11-02-2011, 08:36 PM   #9
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Thanks for the link, I'll have to review it more thoroughly when I have a clearer head tomorrow. So far it looks like a good summary what I discussed above and good advice for those investing with ETFs.
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Old 11-02-2011, 08:50 PM   #10
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I read the article quickly and it was interesting. Personally I stick to the broad ETF's that generally have mutual fund equivalents. For bonds I'll just stick to open end funds.

I just don't want to wake up sweating one night. If the bid/ask spread is narrow when you check over some months then you know it's pretty liquid. If the ETF has a mutual fund equivalent (like VUE has VFWIX) then you know arbitrage will make any weird market happenings pretty transitory. Fewer trades the better.

My 2 cents.
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