You buy ETF’s through a share broker the same as any other shares traded on the ASX, for a list of brokers covering Australia refer to this article How to Buy Listed Investment Companies. Trading costs add up for index investors that frequently rebalance their portfolios and diminishing them to as low a level as possible by selecting a low cost broker is highly desirable.
The two major steps to undertake before buying an ETF are :-
Understanding the spread
Checking the most current indicative value
Understanding the spread
Like buying or selling shares ETF shares always have two prices as well – a buy price and a sell price. The trading spread is the difference between the bid and the ask.
In the example above you can sell Great British Pounds at 5,922.3 but if you are buying GBP you would need to pay 5,923.3 . The spread in this example is 5923.3-5,922.3 = 0.1. Which is a fairly small spread and suggests buyers and sellers have similar views of what the exchange rate is worth.
A very small illiquid stock (eg very few actual buyers or sellers) could have a very large spread, in an extreme example there could be say only one seller and say one buyer. If they both have very different ideas on what the stock is worth you have a large spread (the spread is the difference between what each of them thinks the stock is worth!).
There is no transaction until the buyers and the seller meet in the middle.
Average daily trading volume tells you a lot (Google, Yahoo etc list volume next to historical prices). In general, high-volume correlates with low spreads, though exceptions are not unusual.
ETFs and indicative value
ETF’s have what is known as the intraday indicative value (IIV), this amount represents the best estimate of the funds true net asset value and is constantly changing. The share price may be trading at either a premium or a discount to this estimated value.
When you buy an ETF the name of the game is that you want to buy it for as close to the dollar value of the underlying assets as possible (well if you can get a discount that’s even better!). To do that you need to know what the intraday indicative value (IIV) is.
Although actually pinning down what an ETF is in fact worth at a precise point in time can be a very challenging exercise. For example whilst an intraday value or IIV is published every 15 seconds, the ETF may invest in overseas markets that are closed when its shares are trading in its home market. Valuing the overseas shares can be complex. Nether the less an IIV is available and its the best information an investor can get.
So remember before buying an ETF you need to check the IIV (which is generally available from the funds website) to make sure you are getting what you are paying for.
Though in normal circumstances investors can be fairly sure that a small trading spread probably means the fund is trading close to its IIV. But spreads can widen and investors need to take particular care in these circumstances. Spreads usually widen when the price of the underlying stocks is not easily determined because of:-
1. A lack of liquidity or
2. The spreads of the underlying stocks are large
3. There is just a great deal of market uncertainty.
(also refer to the article How ETF’s Work to better understand the mechanism how the share price is kept very close to the intra-day net asset value.)