Exchange Traded Funds (ETFs)

Buying and selling ETFs

ETFs can be bought and sold on the ASX through a broker or financial adviser in the same way as shares.

The services of brokers range from full service brokers or financial planners through to non-advisory brokers. Non-advisory brokers enable transactions via the telephone or internet – for example CommSec or Etrade. Investors need to open an account with a non-advisory broker in order to purchase ETF securities, or contact their full service broker or adviser.

After trade execution the investor will receive confirmation of the trade settlement. On a regular basis the investor will also receive distribution statements, tax statements and other relevant information to their investments.

There are different ways to trade ETF securities:

• Market orders
• Limit orders
• Conditional orders
• Executing the trade
• Find a broker

Market Orders

A market order is a buy or sell order in which the investor instructs the broker to execute their order at the best price currently available. For example, if an investor wants to buy 100 ETF securities they will put in a market order for 100 securities and hit the execute button. The security order will automatically be matched up with the current market price and executed. The downside of a market order is that you could end up paying a higher price for a security than you intended. Market orders can be used in both the buying and selling of securities.

Limit Orders

A limit order is an order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price).

If you want to buy 100 ETF securities at $50 per security, then your order will be automatically executed when the ETF price hits $50. Limit orders can be used in both the buying and selling of securities. For most investors this method ensures you only pay a price that you are comfortable paying for a security or sell at a price you wish to sell at.

With the limit order you are certain of the limit at which your securities will be bought or sold so there are no surprises. Another aspect of the limit order is the fact that your orders can be placed and executed while you are busy at work or enjoying a game of golf. On the downside it may take a long time for the price of the security to get to the same place as your limit order.

Conditional orders

A conditional order is made when you set a ‘trigger price’ and a ‘limit price’. When the share price rises or falls to your trigger price, the broker endeavours to place a limit order into the market on your behalf. There is no guarantee that the order will be bought or sold when the trigger is hit as the order will need to satisfy trading rules once triggered.

Executing the trade

Once you have chosen an order type, you progress to input the amount of securities you wish to purchase plus the ticker code of the security. Every security quoted for trading on the ASX has a unique three letter identifier commonly called its ticker code.

Trades are settled on a T+3 basis. That means transfer of ownership of the ETF securities and related payments between the buyer’s broker and the seller’s broker are completed on the third ASX business day after the trade takes place.

Other trading techniques

• Stop-loss orders
• Stop-limit orders
• Short selling

A stop-loss order can be applied to a trade in which the trade is executed as a market order once the designated stop price is hit. In this type of order you may, or may not get the price you have placed your stop at. For example, an adviser puts a stop-loss order at $40 for an ETF security. When that security hits $40 on market the order is triggered and becomes a market order.

A stop-limit order is an order whereby the sale or purchase goes through only if you can achieve the limit price set by the order. For example, an adviser puts a stop-limit order on the sale of an ETF security at $40. When there is demand on market to purchase that security at $40 the order goes through and the ETF security sells for $40. If there is no chance of the security reaching the limit sale price, the order does not go ahead.

Short selling is the process of selling shares that are borrowed and is generally used to profit from a decline in the price between the sale and repurchase of an ETF security.

Find a broker

The ASX has a useful broker search engine to assist you in selecting the broker which best suits your investment trading needs.

If you have further questions about trading Vanguard ETFs, please contact Vanguard Client Services on 1 300 655 888, from 8:00am to 6:00pm, Monday to Friday (Melbourne time).