The debut of a new Exchange-Traded Fund (ETF) on the market can present new opportunities for long-term investors. ETFs allow investors to diversify their portfolios or gain exposure to specific sectors or strategies. However, investing in a new ETF can have a different impact when compared to investing in an already listed ETF. Understanding what happens on an ETF's first day on the exchange can equip investors with the knowledge needed to make informed decisions.
In this article, we break down the ETF listing process, including the role of online brokers, what it means for long-term investors , and key considerations when investing.
What are the steps to list an ETF?
There are five key steps involved in listing a new ETF on a stock exchange. They are:
Step 1: Concept and design
The ETF journey begins with an idea. A financial institution (or “ETF sponsor”) identifies demand for an ETF that tracks a specific index, sector, commodity, or investment strategy. They then design the ETF, deciding on details like what assets it will hold, its investment objective, and the index it aims to track, if applicable.
Step 2: Regulatory approval
Next, the institution needs approval from the relevant financial regulatory authority. In Australia, this is the Australian Securities and Investments Commission (ASIC) . ASIC requires a detailed prospectus that includes information about the ETF's objective, risks, costs, and more. This step ensures the ETF meets all legal requirements and is safe for investors.
Step 3: Creation of the fund
After receiving approval from ASIC, the ETF sponsor creates the fund. This involves setting up the structure and deciding how the ETF will be managed. This is the point where the ETF sponsor chooses a fund manager.
Step 4: Appointment of market makers
Market makers are crucial for ETFs. They help ensure liquidity, making it easy for investors to buy and sell shares of the ETF. The ETF sponsor will usually appoint one or more market makers who commit to buying and selling the ETF shares at quoted prices.
Step 5: Listing on an exchange
With everything in place, the ETF is ready for listing on a stock exchange, like the Australian Securities Exchange (ASX) . A ticker symbol is then assigned to the ETF – that’s an abbreviation used to uniquely identify the ETF. From that point on, investors can buy and sell shares of the ETF through the exchange, just like they would with stocks.
What is the role of online brokers?
The launch of a new ETF is an opportunity for online brokering companies, such as Pearler , to demonstrate their value to clients (that’s investors). They do this by providing access, information, and support that aligns with their client investment goals. This effort spans across departments to enrich the investor's experience and foster a supportive community for long-term investing. For new ETFs, online brokers focus on several key areas:
- Accessibility: Ensuring investors have easy access to new ETFs and comprehensive information about them.
- Education: Providing educational resources to help investors understand new ETFs and make informed investment decisions.
- User experience: Maintaining a smooth, efficient investing experience, especially on high-interest days like an ETF launch.
- Community engagement: For platforms like Pearler, which emphasise community and long-term investing, there’s also a focus on facilitating discussions and sharing insights among users about new ETFs.
How are online brokers involved on Day One?
Day one of a new ETF listing is a significant event for an online broker. It involves careful preparation, investor communication, operational readiness, monitoring, and reviewing. Broker platforms aim to provide seamless access to new investment opportunities while ensuring a smooth and informative experience for their users. Here's an overview of what happens on Day One from a broker’s perspective:
Preparation and due diligence
The broker updates its online platform to include the new ETF so it's searchable and tradable when the market opens. This involves adding the ETF’s ticker symbol, description, and relevant financial data.
Before listing, there's also a review process to ensure the ETF meets the platform's standards for listing. The review focuses on the ETF's prospectus, investment goals, and risk profile to confirm investors have access to quality investment options.
Investor communication
Some online brokers send out announcements or newsletters highlighting the upcoming listing. They might share an overview of the ETF, its investment strategy, and how it fits into various investment portfolios.
To help investors make informed decisions, the broker might prepare and share educational content. This could include articles or webinars on how to evaluate ETFs, the benefits of diversification, and long-term investing strategies .
Operational readiness
The broker’s customer support team is then briefed and prepared to handle an increase in the volume of enquiries about the new ETF. Their role is to ensure that investors receive the help, support and information they need at the right time.
IT and technical teams are also on standby to address any potential issues with the trading platform so that orders are placed and executed without glitches.
Day One monitoring and support
Once the ETF goes live on the exchange on Day One, market watch teams monitor the ETF’s performance closely. They keep an eye on trading volumes, price movements, and any technical issues on the platform.
Investors can buy and sell the ETF , with the platform executing the transactions. The market watch team also monitor for any unusual activity or issues.
Meanwhile, the broker might provide updates or alerts throughout the day, especially with any significant developments related to the ETF's performance.
Post-Day One review
After the market closes, the broker reviews the ETF's Day One performance, including investor interest, trading volumes, and any feedback received. This helps in understanding client preferences and market trends.
As part of the review, the broker analyses investor feedback, either through direct communication or observed trading behaviour. This feedback can inform future communications, platform adjustments, and the introduction of similar investment opportunities.
What does this mean for long-term investors?
New ETFs on the market can mean new opportunities for long-term investors. But it's important to research any new ETF thoroughly before investing. Consider how it fits with your investment goals, its costs, the risks involved, and how it's managed. Financial markets are constantly evolving and moving, so staying on top of market updates can help you make informed decisions. With that in mind, there are a few things to consider if you’re thinking about investing in a new ETF.
Considerations for long-term investors
As a long-term investor, buying an ETF as soon as it hits the exchange might not significantly impact your overall investment outcome. That’s if the ETF aligns with your investment goals and strategy. If you do decide to invest in a new ETF, here are some tips to keep in mind:
- Research is key: Regardless of when you buy, thorough research into the ETF's strategy, management team, and underlying assets is crucial.
- Consider the big picture: Focus on how the ETF fits within your broader investment portfolio and long-term goals, rather than the timing of your initial purchase.
- Monitor market conditions: Keep an eye on the market conditions at launch. If the market is volatile, it might be wise to wait for it to stabilise.
- Dollar-cost averaging: If you're unsure about timing, consider dollar-cost averaging into the ETF. This involves investing a fixed amount of money at regular intervals, reducing the impact of volatility.
Should I invest in an ETF on Day One or in Week One?
Buying a new ETF on its first day of listing compared to waiting until the first week can present different opportunities and considerations for investors. This is especially true if you’re focused on long-term investing. Let's look at some key differences:
The decision to buy a new ETF on its first day versus during the first week depends on several factors. Consider your comfort with risk, your assessment of the ETF's long-term potential, and how you manage your investment strategy. Long-term investing success is more about consistent and informed decisions over time, rather than the specific timing of an initial purchase. Resist getting caught up in the hype and figure out the investing journey that works best for you.
