Archive for the ‘Trading’ Category

What Type Of Order To Send When Trading Your ETF Portfolio

By: Pete | Date posted: 01.22.2012 (9:38 pm)

When actually trading to rebalance your portfolio, there are a few critical things to keep in mind. First, you should of course know when to trade, which ETF to trade but also what type of order to place. Buying ETF’s is done in almost the same way as traditional stocks but there are a few differences.

ETF’s generally track indexes. I would avoid trading in the first 5 and last 5 minutes of any trading day. Why? Because volatility is at its peak, and that can sometimes result in odd markets for certain ETF’s. Many simply buy ETF’s at the open by placing an order in the morning or the previous night. I would argue that it’s not a great way to trade ETF’s, or any stocks for that matter.

Do not place market orders: If you did your pick carefully, the ETF’s that you are buying are fairly liquid but I would still caution against it because at specific times, some ETF’s will have little liquidity. Placing a market order can mean getting filled at an unfavorable price. If you want to get filled, simply enter a limit $0.05-$0.10 off from where the market is. That will insure that you do not execute your trade at the wrong time. In the same way, you are better off no trading in moments like the Fed meetings.

Look At The Market Before Trading: Before buying or selling, you should insure that the ETF is being traded correctly. There are a few things that you can look out for:

Tight bid-ask spread
Volume (ideally the ETF has traded a fair bit in recent days)
Price vs. Nav.: You can generally get the value of the fund (as of the previous day) on the ETF issuer’s website. If the fund is an equity fund, that the markets are up 1-2%, you should expect to pay 1-2% over NAV, not much more. Any ETF that has high trading volume will be fine but if you trade less liquid ones, you can take a look at this.

Spread out the volume if necessary: Trading an ETF like SPY is a piece of cake. You could sell 100,000 units in a minute without having any effect on the ETF. However, that is not the case for all ETF’s. When buying larger quantities, it’s important to spread your orders. For example, if you are buying more than 10% of the average volume, it’s advisable to spread out the orders.

In the end, trading ETF’s is very similar to trading any other stock on the markets, you just need to be careful in each step and you will be just fine!

Trading Strategies When Building Your Own ETF Portfolio – When To Trade?

By: Pete | Date posted: 01.22.2012 (9:30 pm)

A big part of the success of your strategy will depend on your ability to be disciplined. Why? Because it’s so much about which day you should trade or how often, it’s about taking the emotion out of it. I think the most important part is to be consistent over the long term. How so?

First, you should decide what your criteria is for trading. It would usually be one of two things:

-Either you have a set amount of money to invest (through savings, dividends, etc)
-Or you use a set frequency

I personally prefer trading at given dates. We discuss the way to get the trades done in another post but the overall mission should be clear:

Rebalance to replicate to your target portfolio by minimizing your trading fees

What this means is that if you should have 25.0% of your money in one ETF and you currently have 24.7%, it’s very likely that you should not be trading as that would be more costly with little to no benefits. There is no set rule but I would say that as a rule of thumb, every rebalancing should bring your actual weights within 5% of their targets.

If you prefer rebalancing each time that you have a set amount of money, I would not go much lower than $2000. The goal is once again to diminish the cost. Of course, you do not want to set the amount too high as the non-invested amounts will tend to perform worse over time. It’s all about finding the right balance.

The Temptations

Over time, you will be tempted to modify that methodology. Why? Mostly because of emotions. If stocks start to lose value very quickly, you might be afraid and wait longer to put more into the market. That will unfortunately generally mean missing the rebound as well. If it can help, you could write down those rules and read them over when you will be tempted. Be consistent.