ETF investors may also want to trade when the underlying market is open. ETFs provide exposure to markets around the world, and U.S.-listed international ETFs may trade during hours when the underlying foreign market is closed, which may result in diverging performance relative to the net asset value. To ensure more closer results to a fund’s NAV, investors can trade Europe ETFs in the morning while European markets are open. However, other markets, like Japan, have no overlap with normal U.S. trading hours, so investors should use limit orders to better control trades. [The Underlying Value of an ETF’s Portfolio]
Johnson also warned against trading near the opening or closing bell. ETF trading activity typically take some time in the morning to gain momentum. Market makers may demand wider spreads in the morning to compensate for the price volatility. At the close, many market makers may also limit their risk, which could cause spreads to widen as fewer are actively quoting prices.
“It makes sense to wait about 30 minutes after the opening bell to trade an ETF and to avoid trading ETFs any time in the half hour leading into the market’s close,” Johnson added.
When executing large bulk trades, an investor should dial in his or her brokerage to help facilitate the trade. Generally, investors should consider help if a trade that makes up 20% of an ETF’s average daily volume or more than 1% of its total assets under management.
For more information on trading ETFs, visit our ETF 101 category.
Max Chen contributed to this article.