ETFs have become one of the most highly sought after investment tools, as they suit both institutional and individual traders as well. At the moment, the majority of people who trade commodities are aware that ETFs like all other shares made available on the exchange market can be sold and bought. This can be done through a complete service broker or online broker. Despite this, traders often wonder if there are any vital aspects to be taken into consideration while trading commodities ETFs. Outlined below are useful commodities trading tips you might want to consider applying to make the venture worthwhile.
1. Always use ‘limit-orders’
When placing an order, it is advisable that you make use of ‘limit-orders’ as opposed to ‘market order’. Doing so ensures you are being placed at your chosen price once you have viewed it on the iNav. Since underlying markets move the whole day, iNav tends to change quite fast especially in the volatile markets. Therefore, any changes witnessed on the iNAV means bid price or offer price change as well. So, there is the risk of being placed at the bid or offer price it changed to. Even so, if the spreads are tight, then this is OK. However, volatile markets have widened spreads. As a result, you are likely to be filled at a wide spread. There are also instances where large orders may get filled before your own orders. This may wipe out the initial price level and your shares will be placed at a price level far off from what is indicated on the iNAV. For this reason, it is always advisable that you get your ideal price using limit orders.
2. Refer to iNav during order placement
A major benefit of using commodities ETFs is the fact that an estimate on fair value is provided at any time of the trading day. As a result, you get the opportunity to place your order at the right level or even closer to the fair value. Issuers of ETF give traders an indication of real time Net Asset Value. Since this calculation keeps changing in real-time, the number calculated is referred to as iNav (Indicative Net Asset Value).
3. Volume appearing on the screen does not indicate liquidity
Unlike LICs and stocks, commodities ETFs are considered open-ended which means units for trading can either be created or redeemed by a fund manager. Consequently, an ETF is capable of continuously issuing new units for as long as assets are growing.
In an instance where an ETF has not been traded a lot on a trading day and you are planning on purchasing or selling units, you can go ahead and do so since the market maker dealing on the other end is willing to buy or sell the units. You will notice that this is completely different when compared to LICs and shares. While shares are traded between investors A and B only, ETF on the other hand can easily be traded between investors A and B and in cases where investor B is lacking, a market maker will be available on screen to either sell or buy to the investor A. If you think about it, this is actually a big advantage of commodities ETF.
The other point worth noting is that, if you wish to either sell or by additional units in a single trade than is reflected on your screen, you can call your preferred broker. Your broker will then get in touch with the ‘market maker’, who will increase units shown on your screen. Consequently, you will be able to either buy or sell units in a single trade. Remember, ETFs are liquid as the underlying market. So, a low volume ETF does not necessarily mean it is low liquidity.
4. Watch out for market trading hours
Market exposure is among the major determinants when it comes to ETF Bid-Ask Spreads. In a volatile market, spreads are likely to be wider than normal. If you are in a position to place an offer when in an open underlying market, only trade when the market is trading as this guarantees the best spread available.
5. Do not trade within the beginning or last 10 minutes of any trading day
Within the periods specified as markets are opening or closing, share prices are more volatile. Instead, trade commodities when the stocks have settled. The best times to do so are 10 minutes after opening of markets and 10 minutes before markets are closed.
The aforementioned tips will hopefully make it easier for you to use up the best opportunities available as you buy and sell.