The Basics of Trading with ETFs | ETF Trends

As exchange traded funds (ETFs) become a mainstream investment tool, more everyday investors and advisors are utilizing ETFs in portfolio compositions to maximize potential gains in an efficient manner.

According to Gary L. Gastineau for RIA Biz, the more you use and trade ETFs, the more you need to ensure you’re using them efficiently and not racking up costs that gobble up your returns. [More Advisors Are Putting ETFs to Work.]

This is even more important if you’re an advisor more used to trading mutual funds. Such trades don’t have much of an impact on the net asset value (NAV), whereas trades in ETFs can and do.

Gastinaeu provides three important principles for minimizing costs:

  • Monitor and measure the cost of trades. Tradings costs generally equal half the spread between the bid and offer, plus commissions and any potential market impacts if trades are large enough to affect the market. Wide bid/ask spreads or significant market impacts could increase total trading costs.
  • Don’t use market-on-close orders.
  • Use limit orders – not market orders. Limit orders allow you to specify the price at which you’ll buy or sell; market orders are orders to sell at the current price and it may not always be favorable to you.

Another smart way to minimize costs is to have a strict buy and sell discipline. We often hear from our readers that investing opportunities we cover are popular and useful, but something we hear even more is the value of our exit strategy, which you can read about and learn how to implement here.

Gastineau offers more great tips for buying and selling beyond what we’ve covered here. Hop on over to read it if you want more!

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

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.