How to trade in ETFs?
As the Indian equity markets are touching new highs every day, the iShares MSCI India ETF, the largest India-specific ETF has increased little over 4.5 per cent over the past month and is now trading above its long-term trend line at the 200-day simple moving average. The Indian market has remained one of the best-performing markets in the Asia-Pacific region. A major factor for this remarkable show is definitely the improvement in corporate earnings, however, the inherent insulation of the Indian economy from the global trade war is also helping its relative performance.
ETF remains one of the best investment windows to exploit the opportunity of rising equity market, especially for someone who is new to investing. While trading in ETFs you should keep following things in mind.
Understand the ETF: Understanding the type of ETF you are buying will help you to analyse its fair value.
Average trading volume: This is a key metric that you should look upon before investing in any ETF. ETFs with high trading volume are good as they allow you to get in and out of the trades without much impact cost. You can build a trading strategy around that. Lower volume of an ETF does not mean it is a bad product, but it limits some of the trading options available with higher trading volume ETFs. Lower traded volume ETFs can be used for long-term if it fits in your financial planning.
Do not trade during opening and closing of the market: It is recommended not to trade in the first 15 minutes and last 15 minutes of trade. This is the period when the prices will fluctuate widely and hence avoid while trading in these times. Even if you trade during this period, it is advisable to put ‘limit order’ instead of market order. A limit order tells your broker the maximum price you're willing to pay for an ETF, or if you're selling, the minimum price you'll take. It protects you from wildly bad executions, although it means your trade won't happen if the market moves away from your order.
Use market maker to place large trades: If you are placing large trades, it's better to use liquidity providers. There is no hard and fast rule what large trade is, however, 5,000 units or 25% of the average daily volume may be considered as large volumes. These are the large institutional market makers who help investors buy and sell ETFs.
Commissions and Fees: ETFs typically trade by the commission. Therefore, look for the brokers that help you execute the transaction with lower commission.
Never ever underestimate the true cost of not paying much attention to the execution of your ETF trades. Executing your ETF trades efficiently is critical for the performance of your portfolios.