How to Trade Exchange-Traded Funds Like a Pro
If you’re familiar with trading stocks, you already know how to trade exchange-traded funds (ETFs). If you aren’t, don’t sweat it. Although there are all kinds of fancy trades you could make, the two most basic kinds of trades are market orders and limit orders.
A market order to buy tells the broker that you want to buy. Period. After the order is placed, you will have bought your ETF shares . . . at whatever price someone out there was willing to sell you those shares.
A limit order to buy asks you to name a price above which you walk away and go home. No purchase will be made. (A limit order to sell asks you to name a price below which you will not sell. No sale will be made.)
Market orders are fairly easy. As long as you are buying a domestic ETF that isn’t too exotic; as long as you aren’t trading when the market is going crazy; as long as you aren’t trading right when the market opens or closes (9:30 a.m. and 4:00 p.m., Manhattan time weekdays); you should be just fine.
A limit order may be a better option if you are placing a purchase for an ETF where the bid and the ask price may differ by more than a few pennies (indicating the middlemen are out to get you), or where there may be more than a negligible difference between the market price of the ETF and the net asset value of the securities it is holding.
This would include foreign-stock ETFs, junk-bond ETFs, and any other ETFs that trade not that many shares — especially on a day when the market seems jumpy. The risk with limit orders is that you may not get your price, and so the order may not go through.
To execute a limit order without risk that you’ll miss out on your purchase, place the order slightly above the last sale. If your ETF’s last sale was for $10 a share, you may offer $10.01. If you’re buying 100 shares, you may have just blown a whole dollar, but you’ll have your purchase in hand.