It’s no secret that Exchange Traded Funds, or ETFs as they are known, are growing in popularity as increasing numbers of investors seek low-cost and efficient access to financial markets. As highly liquid investment vehicles, trading them is easy, but it requires a good level of knowledge to avoid common pitfalls and achieve the best investment outcome.

Here you will find practical information about using ETFs for the benefit of your clients, either as the long-term strategic core of a portfolio or to help achieve other portfolio objectives. ETFs can fulfil a host of other functions too, from blending active and index strategies to aid diversification and potentially enhance performance to providing a temporary home for capital while honing an investment view or searching for a new investment manager.

Of course, a key attraction of ETFs is their accessibility. Traded on stock exchanges, they can be bought and sold at any time the exchange is open, even when the underlying market is closed. That means an adviser can buy a Japanese equity ETF during European trading hours despite the Japanese market being closed.

There can be drawbacks in doing so, however. When underlying markets are closed, spreads can widen for European-listed ETFs because market makers are less able to price the ETF with certainty. Many other factors can affect the bid-ask spread of an ETF, too.

Being aware of these drivers is essential to achieving the best outcomes for clients from investing in ETFs. Armed with this knowledge, investing in ETFs can be as straightforward as the vehicles themselves.

Replication methodology

Before you consider investing in ETFs, it’s important to look under the bonnet to know what you’re buying. Most ETFs use physical replication to track their underlying index, while others use synthetic replication. Watch the video to learn about the differences between ETF replication methodologies.

What are some of the best practices for trading ETFs?

ETFs have two prices: the price you buy at and the price you sell at. Whether you’re buying or selling an ETF on behalf of clients, getting the best price can give them the best possible investment outcome. Our guidance on the best practices for trading ETFs is here to help.

How do I place an order?

Having learned the best practices for trading ETFs, it is time to invest in ETFs. The best way to make a trade depends upon the size of the trade and the specific ETF you want to invest in. In this video, we offer some practical advice by exploring two common scenarios.

How do premiums and discounts work?

An ETF’s market price can be higher (premium) or lower (discount) than its net asset value. The level of premium or discount depends on several factors, including supply and demand, market liquidity, volatility and trading hours. We explore these factors and highlight the key points to note across asset classes here.

Liquidity management

'Cash drag' can cause significant harm to a portfolio. Investing a large temporary cash position in an ETF can help to reduce the likelihood of such performance shortfalls. That’s why investment managers often use ETFs as a means to stay in the market while considering their next longer-term move. Find out more in this video.