What are ETF Best Trading Practices?

Veronika Popova: Hi, my name is Veronika Popova. I’m the director of ETF Strategy at CI Global Asset Management here to talk about best practices when trading ETFs. So there are a few ETF best practices that everyone should follow to ensure optimal execution when trading ETFs. The goal here is to minimize the cost of trading ETFs as much as possible. And the cost that we’re talking about here is the indirect cost known as the bid-ask spread. This spread is the difference between the price that you can buy an ETF at, also known as the ask or the offer price. The price that you can then sell the ETF at, also known as the bid price. And the tighter that spread is, the closer your execution is to the actual fair value of the ETF. So let’s talk about what you can do to improve your outcome.

First and foremost, we always recommend placing trades using a limit order. This will help ensure that you have control over the price that you’re willing to pay or receive by preventing execution at a price beyond the current market bid or ask. Second, avoid trading right around market open and market close, typically the first and last 15 minutes of the trading day. Generally, these are periods where bid-ask spreads widen out for several reasons. It’s best to not transact during this time generally.

Next is to be mindful of market volatility, which sounds very general and common sense. But when market volatility is high, especially surprisingly high during times of macroeconomic events such as Fed or Bank of Canada rate announcements, this can lead to ETFs having wider bid-ask spreads. So best practice is to wait for that volatility to subside before trading if possible.

Another best practice includes considering the time and geography. It’s generally best practice to trade ETFs when the respective market where the underlying holdings trade is open. For example, trading international equity ETFs in the morning, when the European exchanges are open, or avoiding trading fixed income ETFs the day before a statutory holiday since the fixed income OTC or over-the-counter exchanges are closed for the afternoon. Lastly, and most importantly, when in doubt, reach out for help. Keep in mind that assistance is always available when trading ETFs.

ETF investors may encounter issues or questions not covered by the trading best practices that I mention. They also may unknowingly face higher costs when trading larger ETF share amounts, and it’s important for investors to focus on controlling these costs as much as you possibly can. So, rather than going it alone, investors should consider reaching out to their dealer or trading desk or to the ETF issuer for assistance. Hope that helps. Happy trading.

For more news, information, and strategy, visit the Financial Literacy Channel.