Three ETF Trading Tips

When you invest in an exchange traded fund (ETF), you want to pay attention to the "bid-ask" spreads. These are the premiums that you pay every time you buy or sell. With time and some work it is possible to keep these spreads to a minimum, reports Ian Salisbury for The Wall Street Journal. Remember, ETFs are structured like a mutual fund, yet trade on an exchange like a stock, so there are management fees like a traditional mutual fund, and there are brokerage commissions and spreads, like a single stock. These expenses don’t make ETFs expensive, in fact, they are less expensive than traditional funds. Here are tips to keeping the spreads as small as possible:

• Gauge the spread.
  Widely-traded large-company ETFs tend to have thinner spreads than those more thinly-traded small-company stocks. For example, the SPDRs (SPY) has an average spread of one cent or 0.1%. On the flip side, Market Vectors Global Alternative Energy ETF (GEX) has an average spread of 21 cents or 0.5% of its share price.
• Use trading techniques.
  Investors can limit ETF spreads by placing a limit order. In this type of trade, investors offer to buy or sell shares at a set price, not at the only available price at the time of the trade. However, if not many people are willing to trade on those terms, the order might sit a long time.
• Avoid trading early
  Experienced traders know not to trade as soon as the market opens at 9:30 a.m. Eastern time. Market makers have a hard time pricing ETFs during the first few minutes of the trading day, so spreads can be wider for the first five to 10 minutes of the day.