This week I helped a friend invest their entire RRSP portfolio at Questrade. It was a significant sum given that he had been adding to this portfolio for decades. He is now comfortably invested in VBAL, that one ticket portfolio from Vanguard. He had been paying some very high mutual fund fees and was receiving some very bad advice. He is more than happy to now be ‘free’.
You’d think it would be easy right, just find that BUY button or that SELL button. Sure that’s the starting point but we do want to make sure that we get a fair price and the most advantageous price. It’s possible to place stock or ETF orders that can make you overpay, or not get the fair value when selling. When placing larger orders a difference of a few pennies could turn into hundreds of dollars.
An investor in their early 50s might have $400,000 or more in their RRSP. The current price for VBAL is about $26 a share, that will require a purchase of about 15, 380 shares. Every penny of difference in share price is going to make a difference of $153 of more or less shares. There are almost 6 shares riding on every penny.
ETFs do not trade like individual stocks.
Keep in mind that ETFs don’t trade like an individual stock such as my Apple (APPL). For a backgrounder have a read of Ever wonder who makes your ETFs and how they stay on track? While individual stocks trade purely on supply (sellers) and demand (buyers) in the open market, ETFs are priced by 3rd party market makers who do their best to get you the fair value Net Asset Value NAV of the underlying holdings.
There can be greater buy and sell risks with individual stocks, especially if you are buying an illiquid stock, that is, very few shares trade hands each day. With an illiquid stock you might put in an open buy order for $20 and if there are few sellers at $20 your broker may have to then find buyers and $21, $22, $25 and ‘worse’. The stock might only be ‘worth’ $20 but you had to pay much more.
That said, with ETFs there are price risks given that there are many moving parts and challenges and costs that the market makers have to take into account. These market makers are also in business to make money, when in doubt the penny or two in price differential is not likely to go in your favour.
Open market orders or limit orders?
When you get to your order page you will have the option of placing an open market order or setting the price that you will pay with a limit order. Here’s the types of orders page on Questrade.
I invest at TD Waterhouse and here’s that buy and sell screen. Where we see Market in shaded grey, I can toggle that to Limit to place a limit order where I set the price. With this example the markets are not yet open and we see a large discrepancy between the Bid (the offer of the buyer) and the Ask (the offer of the seller). These spreads can cause an open market order price and fill to jump around in quick fashion.
Of course if you place a limit order and only wish to pay $26 per share of VBAL there is no risk that you will pay a penny more per share. The risk is that your order does not get filled at all, or does not get filled in full.
Always use limit orders.
The advice that I received after contacting those in the know and from reading on the Vanguard, iShares and other sites it to ALWAYS use a limit order for ETFs no matter how big or small the trade.
And most would suggest that you put in your order at the Ask or perhaps a penny or two above the Ask to ensure that it gets filled in ‘quick order’. I would suggest that you start at the Ask and and monitor the trade to see if it gets filled. You’ll have to keep an eye on the trade price as it may quickly slip past an order of $26 and move to $26.01, $26.02 or perhaps even move more quickly. If you did not get filled and the price is moving up you’ll have to adjust and place new orders at the Ask or a penny above Ask.
My friend had quick success and even with a large order the full amount was filled at the Ask. In the grand scheme of things and in the long run a penny or two will not make much of a difference, but why give away a few hundred dollars worth of shares?
Here’s what a VBAL trade set up looks before trading this August 1, 2019.
We see that VBAL closed yesterday at $25.75 but is potentially set to open at $25.65. Of course that could change again before the markets open at 9:30 . Or that $25.65 trade might get filled and quickly move on in the more frantic pace that usually occurs in the first half hour of trading.
Avoid the first half hour and last half hour of trading.
That’s a general rule, and it may have more importance when investors are placing a market order on a very illiquid stock. That said even with less volatile ETFs such as the one ticket portfolios the prices can jump around in those opening and closing periods and it can be difficult to get filled, even when you are using those limit orders. So wait half an hour or more, let the markets and the market makers settle in and then place your trade in more calm trading waters. The market makers have more visibility on the day’s markets and the day’s trading activity within the ETFs they manage. Remember the market makers will often create new units for you based on the Net Asset Value of the collective holdings. With a VBAL that is based on the several ETF holdings of VBAL. The price will mostly be determined by the underlying value of the assets at their current weightings.
The price you pay is mostly not based upon the liquidity of the ETF. The market makers can certainly exchange shares between buyers and sellers, from there they will create new shares or retire new shares based on the value of the underlying holdings. It is the liquidity of the underlying holdings that is more important than the liquidity of the VBAL trading.
Here’s VBAL as of end of June. The weightings will change based on market activity. These weightings would have drifted slightly in July. It’s possible that it was rebalanced as well at the end of June to get back to that 60 /40 stock to bond allocation. The Vanguard fund documents simply state that the funds will be rebalanced on a regular basis. I will keep an eye on that moving forward.
When can you use a market order?
If you are buying or selling a very liquid ETF you might submit a market order. In this case though you might be well served to avoid that first half hour and last half hour of trading. I have been a long time investor is iShares TSX 60 XIU, and we still hold a position in one of our accounts. I have no problem placing a small market order when I am adding new funds or reinvesting the dividends and bond income that has accumulated in the portfolio. When I am adding to my Apple or Microsoft in mid day trading I do not worry about placing a market order.
Use a limit order, avoid the open and close.
That one-two punch should help you stay out of trouble and help you get your trades filled quickly and at fair value.
For more resources please have a read of this best practices for ETF trading PDF from Vanguard and 10 tips from Morningstar. Of course, you can always ask Google for more help and suggestions. Or leave a question in the comment section on this post.
Thanks for reading. Please use those share buttons and you can also follow Cut The Crap Investing to get email notifications of new posts.