ETFs offer a simple, low cost way to gain exposure to financial markets around the world. A little knowledge about how they trade can go a long way in helping investors use them more confidently.
3 tips for trading
ETFs trade on global stock exchanges just like most other publicly-traded equities, but they do have unique characteristics. Here are a few ideas that may help investors trade them more effectively.
1. Timing of the Trade
Consider placing trades between 9:40am to 3:40pm EST. The 10 minutes after North American markets open at 9:30am and 20 minutes before they close at 4pm EST may be potentially volatile and sometimes result in slightly higher trading costs. Investors should also consider market news and events such as central bank announcements and corporate earnings results that may impact pricing throughout the day.
Generally, to minimize volatility, it's better to trade ETFs that provide exposure to international markets when the underlying local markets are open. For example, when the U.S. markets are closed for a holiday, such as U.S. Thanksgiving, Canadian-listed ETFs will still trade. However, because the underlying securities aren't trading during these times, bid-ask spreads can increase.
2. Cost of the Trade
ETFS are widely available on most online brokerage accounts and through financial advisors. Many of Canada’s discount brokers offer ETFs without commissions, but it pays to do your homework and shop around before placing your trade. Firms often have a set menu of commission-free ETFs, but charge a regular amount for the rest. Some brokerages also may require a minimum purchase amount or let investors buy an ETF for free, but then charge them for selling it.
3. Execution of the Trade
Just like trading individual stocks, make sure your order type is consistent with your goals:
- To obtain protection against price swings, consider using limit or stop-limit orders (especially in volatile markets)
- If, however, it is important to make sure the trade executes, market or stop orders may be more appropriate (note the potential price risk, though!)
Did you know?
ETFs have two sets of prices: market price and net asset value (NAV). Here are the details:
ETFs are bought and sold on exchanges at the market price that can change throughout the trading day depending on factors like supply, demand and changes in the value of an ETF
You can get price quotes any time during the trading day. Quotes have two parts: bid and ask.
The bid is the highest price a buyer is willing to pay if you want to buy ETF units. The ask is the lowest price the seller is willing to accept. The difference between the two is called the bid-ask spread.
In general, a smaller bid-ask spread means the ETF is more liquid. That means you are more likely to get the price you expect.
Net asset value (NAV)
Like mutual funds, ETFs have a NAV. It is calculated after the close of each trading day and reflects the value of an ETF.
NAV is used to calculate financial information for reporting purposes.