ETFs have become a household name, attracting the eyes of institutions, financial advisors and retail investors. However, many do not yet fully understand how the relatively new investment vehicle works.
“Exchange-traded funds (ETFs) have seen immense growth over the past decade. There are a multitude of benefits, including transparency, tax efficiency and the ability to make intraday trades, that have contributed to the use and growth of ETFs. While these are all beneficial to investors, we continue to see questions around ETF trading,” Paige Kyle, Capital Markets Associate for WisdomTree, said in a note.
While ETFs trade on an exchange like stocks, investors should know that ETFs trade differently and that ETF execution is an important part of investing. To help investors better understand the best practices in executing ETF trades, Kyle outlined a number of do’s and don’ts to successful ETF trading.
For starters, Kyle advised investors to refrain from trading in the first or last 15 minutes of the trading day when trading desks have less transparency and markets experience greater volatility.
ETF investors should avoid market orders. Investors should get in the habit of placing limit orders as this trade order helps people better control their price points.
Always Use Limit Orders
“We advise investors to always use limit orders, especially in times of volatility. We also advise investors to not use stop-loss orders that turn into market orders,” Kyle said.
Additionally, Kyle argued that investors should fully utilize the resources that are freely available to them. For instance, financial advisors or large investors seeking to execute big trade orders can consult a trading desk or a relevant capital markets desk to execute more efficient trade orders.
“The majority of advisors have access to a trading desk. These desks have access to expert market makers who can access the underlying liquidity,” Kyle said.
To put this notion in perspective, Kyle pointed to a WisdomTree client whom traded 811,192 shares on an ETF or just over $20 million notional at a penny inside the offer that was 30 times the average daily volume at the time of the trade.
“The investor worked with his or her trading desk because they knew that there was plenty of liquidity available via the underlying securities,” Kyle added. “Making a simple phone call or sending a simple email can make the world of a difference.”
For more information on ETFs, visit our ETF 101 category.