With the recent focus on ETF-trading behavior and the differences between an ETF’s market price and the net asset value of its underlying assets (see Jim Rowley’s blog on this topic), I have been receiving even more questions than usual about ETF trading mechanics.
As head of Vanguard’s ETF Capital Markets Team, I spend much of my time talking with advisors and other clients about the best ways to trade ETFs.
We all learned in elementary school a simple reminder about fire safety: Stop, drop, and roll. There’s a similar way to think about safety with ETF trading: Limit, block, and call.
Limit
When you trade ETFs, consider using limit orders, not market orders, as your default trade type. Whether the markets are calm or volatile, protecting your trade by using a limit order that defines your price is sensible and smart. While a market order ensures the trade’s execution, it doesn’t ensure the price at which it will execute. How comfortable are you with explaining to a client why the ETF trade was executed at either the high or low price of the day or way off from the value of its underlying assets? Limit orders may also limit those conversations.