No question, exchange traded funds (ETFs) are easy to use and simple to trade. But that doesn’t mean there aren’t things you should do to give yourself a chance for success and while keeping your costs at a minimum.
There are distinct applications that should be utilized when trading your exchange traded funds (ETFs) or buying them. Holding an ETF position for years has no bearing upon your investment, however, entering and exiting a position can add up the fees. (Seven things to know when trading ETFs).
Ron Rowland for Money and Markets has these five tips for trading your ETFs:
- Shop around: Lower commissions mean there’s less eating away at your principal, so shop around for lower fees. A full-service broker may charge large amounts for “working” your money, however, this only rings true when you are dealing with millions of dollars. Typical small brokerage firms are everywhere and they charge about $8-$12 per trade.
- Inside the spread: This is where you want to be. Check out the bid and the ask spread and you will find out the current prices. The spread between the bid and the ask prices are where the profits are to be made.
- Limit orders: This an instruction to the broker to not process a trade unless the price is at or better than the limits you set. When doing a “market” order, you may not get the best price. Limit orders keep surprises at bay.
- Underlying market: The liquidity of an ETF is determined by several things, one of which is the liquidity of its underlying holdings. If an index holds low-volume stocks, the ETF could reflect the lack of liquidity, as well.
- Don’t follow the crowd: Trading is heaviest at the start of the day and at the end of the day. For large numbers of shares, moving at the end of the day may be best, but for a typical trade, midday fares well. Market conditions are constantly changing, so be aware of what is going on, while also having a plan of your own. (For more trading tips, read on).
For more stories about trading ETFs, visit our ETF 101 category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.