Exchange traded funds are just what their appellation implies: funds that trade on an exchange. Consequently, potential ETF investors should understand how best to utilize the investment tool.
While ETFs help investors easily and efficiently access many corners of the markets, people should still exercise caution when buying and selling ETF shares, writes Ben Johnson, director of global ETF research for Morningstar.
Specifically, investors should consider some factors when trading ETFs: Use limit orders, invest when the underlying market is open, avoid the open and the close and phone in large orders.
To start off, investors should use limit orders to better execute trades.
“If I had to provide just one tip, this would be it. Use limit orders when trading ETFs,” Johnson said.
Investors may rely on market orders to execute an entire order quickly, regardless of the price. While market orders may work for large ETFs that experience huge trading activity, market orders can cause an expectations to go out of sync with reality. Instead, a limit order helps ensure an investor will get the price one has set, but the order may take longer to be filled than an ordinary market order. [Trading ETFs: Why Use Limit Orders]