Three things to know before buying ETFs

By Vanguard

ETFs

Buying an ETF? Understand order types, market conditions and trade timing

Exchange traded funds (ETFs) have become a popular way for Australians to invest, offering a simple and relatively low-cost way to gain exposure to a range of investments through a single trade, although costs and outcomes can vary depending on the ETF and market conditions.

Like shares, ETFs can be bought and sold on a stock exchange throughout the trading day. However, while they trade in a similar way to shares, ETFs have some unique features that investors should understand before they invest.

Here are three factors investors may wish to consider when buying ETFs.

Understand the different types of orders

When you buy or sell an ETF, you place an order through a broker using the ETF’s ticker code, which is typically a three-or four-letter code listed on the stock exchange.

There are two common ways to place an ETF trade: a market order or a limit order.

A market order instructs your broker to buy or sell units at the best available price at the time the order is placed. While market orders are generally straightforward and are often executed quickly, the final price may differ from the price you expected, particularly during periods of market volatility.

A limit order allows you to specify the maximum price you’re willing to pay when buying, or the minimum price you’re willing to accept when selling. Some investors prefer limit orders because they provide greater control over the price at which a trade is executed. However, there is no guarantee the order will be completed if the specified price is not reached.

Understanding the difference between these order types can help investors decide which approach best suits their circumstances.

Be mindful of market conditions

ETF prices are influenced by the value of their underlying investments, which means market conditions can affect trading prices throughout the day.

Periods of heightened market volatility may result in wider bid-ask spreads or temporary differences between an ETF’s market price and the value of its underlying holdings. Significant economic announcements, company earnings releases and central bank decisions can also influence market movements and ETF prices.

For this reason, investors may wish to pay attention to broader market conditions when placing trades and consider how different order types may affect the outcome of their transactions

Consider when you place your trade

The timing of a trade can also influence an ETF’s trading experience.

Some investors prefer not to trade immediately after the market opens, as it may take time for prices across the market and an ETF’s underlying investments to fully reflect available information.

Similarly, trading activity may change near the market close, which can affect the availability of buyers and sellers and, in some cases, lead to wider spreads.

While ETFs can generally be traded throughout the trading day, understanding how market activity varies at different times may help investors make more informed decisions.

Why investors use ETFs

Investors use ETFs for a variety of reasons. Depending on the fund, ETFs can provide exposure to Australian and international shares, bonds and other asset classes through a single investment.

Many ETFs are designed to track an index, which can make them a relatively low-cost way to access broad market exposure. ETFs may also help investors diversify by spreading their investment across many securities rather than relying on a smaller number of holdings.

As with any investment, it’s important to understand how an ETF works, the risks involved and whether it aligns with your personal objectives, financial situation and needs.

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^{Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal. We have not taken your objectives, financial situation or needs into account when preparing this article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the Product Disclosure Statement (PDS) and any other relevant disclosure documents for selected ETFs, before making any investment decision. You should seek professional advice from a suitably qualified adviser. The Target Market Determinations (TMDs) for Vanguard’s financial products, each of which includes a description of who the financial product is likely to be appropriate for, are also available free of charge. You can access our PDSs, other offer documents and TMDs at vanguard.com.au (other than any superseded TMD) or by calling 1300 655 101. This article was prepared in good faith and we accept no liability for any errors or omissions.}

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