Exchange traded funds are listed on an exchange and trade like any common stock. Consequently, investors should also utilize limit orders to better control and execute trades, diminishing the risk of any potentially unwanted surprises.
When purchasing or selling ETFs through a brokerage account, investors can choose among a various order types, such as a market order or a limit order. The options also apply to stop-loss orders that trigger an automatic sell when an ETF dips to a certain price.
However, investors should understand the differences between the order types. Specifically, a market order is designed to fill immediately at the best available current price and the price at which the order was placed 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,” according to the Securities and Exchange Commission. “In fast-moving markets, the price at which a market order will execute often deviates from the last-traded price or ‘real time’ quote.”
For instance, the widely observed and highly liquid SPDR S&P 500 ETF (NYSEArca: SPY) is also susceptible to sudden price discrepancies. During the late December 18 trading session, a large market order pushed SPY to $212.97 per share just minutes before the index ETF closed at $206.98, writes Chris Dieterich for Barron’s. Since the spike, SPY has yet to reach the same heights.
Earlier in December, the popular gold miner stock ETF, Market Vectors Gold Miners ETF (NYSEArca: GDX), experienced a so-called mini flash crash that erased almost 10% of its value in less than one second before ending the day up 0.3% at the closing bell. [A Santa Claus Rally for Gold Miners ETFs]
On the other hand, a limit order could have helped an investor prevent a similarly unwanted run-up. Specifically, a limit order is designed to fill at a specific price or better. A buy limit order would purchase the ETF at or below a stated price while a sell limit order will only be triggered at the stated limit price or higher.