What Type Of Order To Send When Trading Your ETF Portfolio

By: Pete
Date posted: 01.22.2012 (9:38 pm) | Write a Comment  (0 Comments)

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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!

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