HOW ETFs TRADE

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.

Timing of trade

1. Timing of 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.

Cost of the trade

2. Cost of the trade

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.

Execution of the trade

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 orders (especially in volatile markets)
  • If you urgently want your order filled, investors should consider a “marketable limit” order: this is a limit order that is priced aggressively: higher than the asking price (if buying) or lower than the bid price (if selling)
  • In general, we believe investors should avoid market orders

DID YOU KNOW?

ETFs have two sets of prices: market price and net asset value (NAV). Here’s the details:

Market price

Market price

ETFs are bought and sold on exchanges at market prices that change throughout the trading day, mostly based on the underlying value of the ETF’s holdings, and also other factors like supply and demand for ETF units.

  • 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 sell ETF units. The ask is the lowest price a seller is willing to accept if you want to buy. 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 the cost of buying and then later selling the ETF is lower.
Net asset value (NAV)

Net asset value (NAV)

  • Like mutual funds, ETFs have a NAV. It is calculated after the close of each trading day and reflects the end-of-day value of an ETF’s holdings
  • NAV is used to calculate financial information for reporting purposes
Buying iShares ETFs can be easy