Edda Vogt has been working in the financial market for 25 years and has been with Deutsche Börse for 23 years. As Senior Editor and Channel Manager, she is responsible for the social media channel and the Börse Frankfurt website, among other things. Fondsfrau Anke Dembowski visited her at the Börse Frankfurt and talked with her about ETF trading on Xetra and what (private) investors should pay attention to.
ETFs are increasingly coming to the attention of investors. Is this also reflected in trading volumes on the stock exchange?
Edda VogtYes, definitely! ETFs have been accounting for an increasing share of stock exchange trading for several years now. Take any trading day, for example, April 24, 2024: On that day, we had a total turnover of 116 billion euros on Xetra; 97 billion euros of that were in stocks, and 18 billion euros in ETFs. The money market XTrackers II EUR Overnight ETF for example, is traded a lot and often has a higher daily turnover than some DAX stocks. Or the iShares MSCI World ETF.
How does ETF trading work on the stock exchange?
Edda VogtEvery ETF has one or more "Designated Sponsors." They continuously provide prices because they are in constant contact with the issuers. ETF shares are then traded both on the floor and in Xetra, although continuous trading only takes place in Xetra.
Conventional funds are also traded on the stock exchange in Germany. Does that work similarly to ETF trading?
Edda Vogt: Actively managed funds are only traded on the floor, not in Xetra. And trading fund shares on the floor works differently than for ETFs. For conventional funds, an NAV is calculated and published only once a day, but fund shares are still supposed to be traded during trading hours. In Frankfurt, two trading banks have specialized in this: Baader Bank and ICF Bank. They use reference models based on the last published securities basket of the fund. This way, the trading banks can provide continuous price quotes.
Do you think it's sensible to trade conventional funds on the stock exchange?
Edda Vogt: Well, nowadays, there are many fund platforms where you no longer pay front-end loads. With or without them, you should make a cost comparison: How large is my order, and how much are the order fees? When trading fund shares on the stock exchange, you know immediately at what price your order will be executed. Additionally, you can use limit or stop-loss orders. When buying through the KVG, you only find out the price the next day, which can be problematic if the markets are very active.
It can also make sense to trade fund shares on the stock exchange if it's no longer possible through the KVG – for example, with some open real estate funds. On the stock exchange, however, you need to find a buyer, and they may only buy the shares at a discount to the intrinsic value.
What should be considered when trading ETFs?
Edda Vogt: Most ETF investors value low costs. Costs should not be neglected, as they are essentially a negative compounding effect. Over 20 years, it makes a significant difference whether I have 0.8 percent or 1.6 percent annual costs. To keep costs as low as possible, you should look for a low-cost custodian bank – one that is cost-effective relative to the service you need. Children's accounts, individual advice... such things, of course, cost money. So, you need to think in advance about what level of comfort you want and then find a bank that meets your requirements.
What tips can you give our readers for trading ETFs?
Edda Vogt: We already mentioned the importance of low costs. In ETF trading, there are two types of costs: a) The direct costs of the transaction, which depend on the custodian and the selected trading venue. b) The indirect costs of the transaction, namely the spread. This varies depending on the time of day. On Xetra, trading occurs from 9 AM to 5:30 PM, but it's best to use the times with the highest liquidity for your trades, as that's when the bid-ask spread is lowest. This is usually around midday. At the edges of trading hours, spreads widen. This is also shown by the liquidity measure, which reflects the indirect costs.
Does the orientation of the ETF matter here?
Edda Vogt:Yes! To ensure the price reflects actual market conditions, you should see when and where most of the ETF's underlying assets are traded. If the ETF includes foreign stocks, you should trade when the home market is open. For Asian markets, that's in the morning; for US stocks, in the evening. If you trade a US-stock ETF in Xetra in the morning, there's a risk that the price won't be accurate because the US market is still closed.
What else is important in ETF trading?
Edda Vogt: I strongly advise trading ETFs only with limit orders to avoid slippage, which are sudden, significant price movements. Our Designated Sponsors are usually in the book 99 percent of the time, but if your order goes through when they're temporarily out, the limit is crucial. It works well to set the limit within the spread. This way, you get the best possible price on the reference market, which all others follow. It's always worked for me. And if the market moves away, as stock market people say, I simply place the order again. Changing a limit order shouldn't cost anything.
Where can I see the bid and ask prices of ETFs?
Edda Vogt: The best place is on the relevant financial websites. On boerse-frankfurt.de, you can see floor trading prices in real-time for free. Even better, if you register, you get real-time Xetra prices, including the order book, for three ETFs. This shows the best ten bid and ask limits of others. An "open order book" means you can see your order and others' orders directly in the system. Some online brokers also show bid and ask prices. It's advantageous if they do this for multiple trading venues. Many low-cost online brokers only offer one market, which limits your options and makes it hard to compare prices and spreads.
What is a normal spread for ETFs?
Edda Vogt: We've established that the spread varies throughout the day. Right now, we have prime time. The most traded ETF today is the Xtrackers EURO STOXX 50 ETF. At the moment it has a spread of 0.02 percent. The spread for heavily traded ETFs is usually between 0.03 and 0.06 percent. Smaller, less traded funds can have a much higher spread.
Avoid days when the market is very hectic. I dislike the term "witch day," but every three months, there's a triple witching day at the futures exchanges, which can be extremely hectic. Private investors should avoid these dates. Also, check if a president has resigned or something else has happened that could cause market disruption before you trade.
ETF providers say ETFs are much more transparent than conventional funds. What makes them so transparent?
Edda Vogt: The open order book makes ETF trading more transparent than trading conventional funds. ETFs also add to transparency by continuously publishing their composition.
Thank you, Edda, for the practical tips on trading funds on the stock exchange!
Anke Dembowski is a financial journalist and author of various investment fund-related and other financial books. She is also a co-founder of the "Fondsfrauen" network.