Buying Exchange Traded Funds

[JB]

I'm primarily an index investor.  Since I Ered I don't make regular purchases aside from reinvesting dividends.  I'm thinking about moving to ETFs because of the very low cost costs and attractive mix of index funds.

Since I may move fairly large sums over I'm concerned that the price/NAV spread could wipe out the cost advantage.  For example, say I want to move $500,000 (hypothetical) to the iShares SP500. But 500K is a huge chunk to trade (.5% of the daily volume) at one time and could drive the price up beyond the NAV thereby erasing the cost benefits.  The same thing could happen when it's time to sell.

My broker offers limit orders, but I'd really like to make the purchase relative to the NAV.  For example, trigger at .99% NAV. 

Does anyone have experience trading large sums into ETFs?  Did the broker break it up into smaller purchases at increasing prices? Do any brokers offer limit purchases relative to NAV?

 

[youbet]

sorry to answer with another question instead of an answer.....

But, what about capital gains. Won't you have to pay capital gains on the nice run ups your index funds have seen in the last couple of years?

 

[Nords]

Does anyone have experience trading large sums into ETFs?  Did the broker break it up into smaller purchases at increasing prices? Do any brokers offer limit purchases relative to NAV?

I don't have a lot of large-sum experience, but from what I've read the arbitrage is pretty fierce. If the price ever dropped to .99 NAV you'd see some pretty brisk trading by the big guys to buy the ETF and break it up into the creation units. I don't know how long the edge would last.

If I buy 1000 shares of a $17 ETF the broker (Fidelity) seems to execute one trade at 100 shares and follow it up with the other 900 at the same price. Same for both PID and IJS. I've bought bigger units of other ETFs (especially QQQs) but I can't remember if there was any effect on the price. But QQQ is much more liquid than the other two ETFs.

I've never seen limit purchases relative to NAVs, but you could talk directly to Fidelity's trading desk or your broker. Fidelity gives away specialized frequent-trader software that might offer features that I don't get from the website. I guess you could also try to put in your own daily limit buy orders if the price isn't moving that quickly.

 

[brewer12345]

If the ETF in question is large and liquid, it should be no biggie. If it is a specialty sector ETF, maybe not so easy to get good execution. The way I have done this is to get real-time quotes for the NAV and use limit orders that deviate by a penny or two a share. Just keep an eye on things and don't let your order sit there if it doesn't execute. You want to buy at or below NAV.

But if you are already with someone like VG, it may not be worth the effort.

 

[eridanus]

Explore using an AON (All-Or-None) order and a VWAP (Volume-Weighted Average Price) order.

 

[JB]

But, what about capital gains.  Won't you have to pay  capital gains on the nice run ups your index funds have seen in the last couple of years?

YUP, this is an issue.  For now I'm buying using the proceeds from individual stock sales.

This chart shows the tracking errors for all ETFs traded on the AMEX.  Tracking errors can be significant and can easily wipe out cost benefits for funds held for a year or so.  An extreme example is SLV which has an average error of 2.78% and a max error of 10%!  It's only been trading for 4 days.

I still haven't found a way to find the instantaneous NAV on an ETF.

edit: the AMEX chart indicates premium/discount vs. NAV, not tracking error

edit:  William Bernstein on ETFs from Fall 2001.