A key characteristic that sets exchange-traded funds (ETFs) apart from mutual funds is the ability to trade them intraday, but the poor infrastructure of some investment platforms means this benefit is often being lost.

The big difference between ETFs and mutual funds is ETFs trade on the stock exchange just like ordinary shares. In theory you can buy and sell ETFs at any time during the trading day, which gives you greater investment flexibility than with mutual funds which tend to trade only once a day.

ETFs are priced continuously during market opening hours based on the value of their underlying portfolio; this means you should know exactly what price you’ll receive when you place your order to trade. By contrast mutual funds create their price, or net asset value, at the end of the day based on the underlying holdings after the close of trading; you won’t know beforehand what price at which your buy or sell order will be transacted.

AGGREGATED TRADES

The majority of DIY investment platforms are members of the London Stock Exchange which means they can facilitate intraday trading and real time pricing of ETFs. But there are some - for example Fidelity and Cavendish Online - which aren’t members of the exchange and have to use a third party broker to deal in ETFs on behalf of their customers. These platforms aggregate all of the deals placed and pass them onto their third party broker who executes the basket of trades just once a day.

This problem stems from the fact that many platforms are traditionally fund platforms and are yet to develop the infrastructure to support ETFs; AXA Self Investor and Chelsea Financial aren’t able to hold ETFs at all. If you use Fidelity you’ll see ETFs priced in real time on its fund supermarket, but the price you actually get is the price at the time of the daily trade.

Being able to trade ETFs throughout the day is a fundamentally important trait and it is one of their key attractions when comparing them with traditional tracker funds. ‘While both ETFs and tracker funds are designed to track an index, the key differentiator of ETFs is the ability to trade them throughout the day like a stock, without incurring significant costs. Many investors choose ETFs over trackers because they value the flexibility of intraday trading, in addition to the choice that the huge variety of ETFs provide,’ says Pollyanna Harper, head of iShares UK intermediary sales at BlackRock.

Facilitating intraday trading rather than executing batch orders is important for two key reasons. ‘First, it allows the customer to execute their trades at their desired price - something they would be unable to do were a broker to batch orders and choose when the deal is struck. Second, it allows the customer to manage risk more effectively as they can decide when they want to sell, if they wish to book a profit or cut a loss,’ explains Charles Galbraith, managing director of AJ Bell Youinvest.

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MARKET VOLATILITY

Intraday trading is especially important in volatile environments when markets can experience significant intraday movements. ‘If you expect big news to move the price of the stock market you want to be able to get a price and get in or out before the impact is concluded. If that market event happens in the morning and you can’t buy or sell until the afternoon, the price may have moved a long way from you by the time your price is confirmed,’ says Ben Thompson, business development director, listed products and Lyxor ETF UK at Societe Generale.

Intraday trading is most important for short-term traders and speculators. Many investors use ETFs as a long-term investment tool so intraday trading isn’t vital, but it’s still a reassuring safety net and it’s useful to see your portfolio value being updated live throughout the day. ‘It also provides investors with confidence as the price is public, regulated by the rules of the exchange and easily accessible,’ adds Thompson.

The range of ETFs offered by Fidelity is relatively small compared with the likes of Hargreaves Lansdown (HL.) and it is mainly comprised of products you’d hold for the long-term - it doesn’t offer any short and leverage exchange-traded products (ETPs) or oil or natural gas exchange-traded commodities for which intraday movements would have the most impact.

‘As we understand it, most of [the direct to consumer fund platforms] ETP offerings are relatively limited, generally focused on products that fit a traditional buy and hold strategy, for which an intraday move would have less of an impact. Having said that, investors should understand that ETPs have a wide range of execution opportunities and they should ensure that any execution strategy matches their expectations. For tactical or short-term trades, platforms that offer real time pricing may be an option they should consider,’ says Townsend Lansing, head of short and leveraged ETP platform at ETF Securities.

A spokesperson for Fidelity says: ‘We have found our investors typically use ETFs to access the markets on a lower cost basis and tend to hold these investments over the long-term, therefore the ability to trade ETFs and ETCs (exchanged-traded commodities) on a short-term basis is not a service our clients require.’

If platforms only allow daily trading it also means limit orders aren’t possible because you’re restricted to one point - and price - in the day. Limit orders are important because they ensure you don’t pay more than you’re willing to; with market orders you’re left at the mercy of a fluctuating price. They are especially useful if you’re trading low volume ETFs which are more likely to be volatile. A limit order can help lock in a profit or make it easy to buy when a security hits a desired price without constantly monitoring the market.

Even if your platform facilitates intraday trading it isn’t necessarily as straightforward as you might think. If it’s the first time you’ve traded in an ETF, Barclays Stockbrokers will ask you to complete an ‘appropriateness assessment’ questionnaire before you can complete the transaction. This is because it classifies all ETFs as complex products, regardless of the fact that many are relatively simple and low risk.

ETFs have many other advantages aside from intraday trading - for example they offer a huge choice of indices and asset classes and they are very cost-effective - but the key is in the name. ‘ETFs are “exchange-traded” funds so when the ability to trade freely is removed you lose a key benefit from these investments,’ says Adam Laird, passive investment manager at Hargreaves Lansdown.