Caution: Use Limit Orders with ETFs | ETF Trends

One of the things investors and traders like about ETFs is the ability to buy and sell during the day. However, investors need to be careful when trading ETFs to make sure they don’t get hurt by bid-ask spreads or deviations from fair value, especially in unsettled markets.

When buying or selling ETFs through a broker, investors can use a market order or a limit order. The choice also applies when investors are setting up stop-loss orders that trigger an automatic sell when an ETF falls to a certain price.

A market order is designed to fill immediately at the best available current price. As the SEC’s website explains, the price at which a market order will be executed is not guaranteed.

“It is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed. In fast-moving markets, the price at which a market order will execute often deviates from the last-traded price or ‘real time’ quote,” the SEC notes.

A limit order, however, is designed to fill at a specific price or better, and is not guaranteed to execute at the order price, although that’s not necessarily a bad thing. [Protecting Your ETF Trades]