The ETF industry is booming, continuing to set records with inflows and assets under management. With an influx of mutual fund clones into the ETF world, it’s important for investors coming from mutual funds to understand the difference in trading for ETFs and the optimal times to trade.
ETFs are attractive for the cost savings and tax efficiency that they offer, as well as the liquidity that they have compared to mutual fund counterparts. ETFs trade all day, and as such, it’s vital that investors understand the importance of net asset value (NAV). NAV is the cumulative value of the underlying securities within a fund at their closing prices. It is calculated at close Monday through Friday on the markets at 4 PM EST.
Because ETFs trade all day long, there are periods of time when the spread between the NAV and the actual market price is wider, which affects performance. Active fund managers and traders seek to execute their trade orders as close to the NAV orders as possible; a wider spread between NAV and the market price can create differences in potential and total returns over time.
Traders tend to avoid executing orders at market open and close, as these typically can be some of the most volatile times of the day. An exception to avoiding trading in the first and last 15 minutes is made for volatility funds, which are built to capture volatility so that it benefits investors. In order to prevent wider spreads between NAV and the intraday price, it is best to execute trade orders 30 minutes after open and finish by 30 minutes before close so as to avoid the rapid price movements that can occur in the first and last 15 minutes.
It’s also prudent (again, unless trading in volatility funds) to avoid executing trades during periods of volatility and uncertainty in markets. The difference in an ETF’s intraday price if it is trading above NAV is called trading it at a premium, and, conversely, if it is trading below NAV it is called trading at a discount. Volatility in markets can lead to increases in trading volumes, a change in the liquidity of underlying securities, and a host of other effects that would push an ETF to trade at prices different from the NAV.
Active management firm T. Rowe Price eight different actively managed ETFs, many of which use the same strategies as their mutual fund counterparts and are overseen by the same portfolio manager on both the ETF and mutual fund sides, bringing experience in trading optimally in market conditions.
The firm brings a bevy of research and experience to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
For more news, information, and strategy, visit the Active ETF Channel.