There are plenty of best practices for advisors to keep in mind when trading in exchange-traded funds (ETFs) for their clients, according to Trevor Cummings, head of business development, exchange traded funds, RBC Global Asset Management.
According to a Q4 2013 report by Toronto-based Investor Economics, retail advisors are becoming a big part of the ETF market. The report shows that as of Dec. 31, 2013, Canadian institutional and retail investors held $78.6 billion in U.S. and Canadian ETFs. Of that sum, $51.9 billion was held by retail investors, with the lion's share going to full-service investors ($31.6 billion) over do-it-yourself investors ($18.7 billion).
"Do-it-yourself (DIY) investors are significant, but more advisors are using ETFs than DIY investors," said Cummings, who spoke at the ETF Conference, hosted by the Canadian ETF Association (CETFA) and Mindpath in Mississauga, Ont. on Thursday.
Here are five tips for advisors looking to trade ETFs to keep in mind:
> Use limit orders
Cummings recommends placing limit orders for ETFs rather than market orders.
It wasn't long ago that the "Flash Crash" occurred and the Associated Press Twitter feed was hacked, said Cummings, two events that created large swings in the markets within a short period of time. As such, market orders leave advisors open to entering the market with an ETF at the wrong time
"Please, please use limit orders only," he said, "there's no upside at all to using a market order."
Advisors who like to look at the bid and ask of an ETF can place a limit order at the ask price, said Cummings.
> Avoid market openings and closings
The TSX measures the market buys and sells within the first 15 minutes trading so as to try to satisfy the maximum number of investors with fills, said Cummings, which could be problematic for advisors looking to make an ETF trade.
"Things kind of get a little bit hairy in the first 15 minutes of trading and the last 15 minutes of trading," he said, "if you can avoid it, it's definitely a good idea."
> Work with providers
Advisors interested in making a large ETF trade should not be put off by low volume numbers. Cummings recommends speaking with ETF providers directly, as these companies can help advisors negotiate with market makers to better fill the order.
"We want to help facilitate trades," said Cummings. "We want to be here as a resource so you can get on that bus and, in the same way, so you can get off that bus as well."
> Do your research
Have a due diligence process, said Cummings, that includes being able to explain to clients exactly what kind of ETF you are holding.
"Not all ETFs are created equal," he said. "Some are terrible and some are great."
> Buy Canadian
Avoid tax issues with ETFs by buying Canadian funds for clients as opposed to those listed on a U.S. exchange.
Changes to Form T1135 and other new tax reporting requirements means that holding U.S. ETFs can be onerous for clients, said Cummings. Whereas clients can avoid those reporting headaches by purchasing TSX-listed ETF that buys U.S. stocks.
As well, purchasing U.S. ETFs could subject a client to a double helping of withholding tax. "Every time a dividend crosses a border there's a withholding tax," said Cummings, "and you want to avoid that and minimize it if you can."