Written

For

The

Australian

-

The

secret

to

saving

on

ETFs:

trade

not

too

early,

not

too

late

Here's something most ETF investors have no idea about: the time of day you press "buy" can quietly cost you money.

Exchange-traded funds have exploded in popularity, growing from $3 billion in 2010 to more than $20 billion by late last year. And it's easy to see why. With management fees typically between 0.2% and 0.5%, ETFs are a fraction of the cost of active managed funds, which can run two to five times higher. You also get instant diversification — rather than betting on one bank stock, an ETF can spread your money across the whole banking sector.

But here's the wrinkle. ETFs trade on the ASX like shares, and their prices are set by "market makers" — the likes of JPMorgan, UBS, Susquehanna and Deutsche — who profit from the bid/ask spread. Think of them as the foreign exchange counter at the airport, adjusting prices continuously and pocketing the difference.

The catch? Those spreads are widest at the start and end of the trading day. Vanguard's Paul Chin recommends waiting at least 30 minutes after the market opens before placing an order, because the ASX opens in a staggered manner and market makers can't price ETFs precisely until things settle. Same story at the close — spreads widen as market makers wind back their risk.

For international ETFs, there's another layer. Trade them in the afternoon, when Asian markets are open and European/US markets are closer to opening. That's when the underlying securities can be priced most accurately.

One more thing worth flagging: not all ETFs are created equal. Two "high dividend" ETFs can look identical on the label but hold wildly different portfolios — one might cap banking exposure at 20%, the other might not. Read the fine print.

Get the timing right, get the product right, and you'll keep more of your return where it belongs — in your portfolio, not in a market maker's pocket.