Let's look at a few best practices to help you achieve favourable prices for your ETF trades. Use limit orders. These let you determine the maximum or minimum price at which you’ll execute an ETF trade. While limit orders offer you control over price, there are some risks that your order won't be fully executed. Market orders, on the other hand, can be effective when you're buying or selling ETFs with significant liquidity and narrow spreads.
However, since the overriding objective of a market order is trading execution rather than price protection, it's possible that you will receive an undesirable price for your trade. Consider market volatility. Be wary during volatile periods or when there are major events that affect markets. Market volatility can cause the prices of an ETF's underlying securities to move sharply, which can in turn cause the ETF shares to have wider bid-ask spreads.
Limit orders may be beneficial in such situations because of the price protection they provide. Keep abreast of news. Investors should pay attention to market news as ETF prices may swing in response to releases of economic indicators or statements from central banks. Earnings and other news from companies that are large constituents of an ETF can also have an effect on the ETF price.
Understand liquidity. A common misconception is that ETFs with lower average daily volume, or ADV, are not as liquid as others in the marketplace. Heed the clock and calendar as spreads can widen at certain times of the day and on certain days of the year. So here are a few points to consider. At the market's open, some of an ETF’s underlying securities may not have begun trading, which means a market maker can't price the ETF with certainty. At the markets close, fewer firms may make markets in an ETF as market participants try to limit their risk, so fewer shares may be listed to purchase and sale than other times of the day. And when international markets are closed, spreads can widen for European-listed ETFs that invest in markets with different opening hours. For example, a Japanese equity ETF that trades on your local exchange, for example, the London Stock Exchange, it may have wider spreads once the Japanese exchange is closed. If you're trading an ETF that invests internationally, it's helpful to know the market holidays of the relevant overseas exchanges. For example, on Thanksgiving, you may be able to purchase shares of the S&P 500 ETF on your local exchange, but the spreads may be wider due to the underlying U.S. stock market being closed. A dealing desk, if one is available to you, can use various trading tools to help you source liquidity, especially if your order is large and in illiquid markets.
