What are some best practices for trading ETFs?

By following a few best practices, you can help ensure favorable prices for your ETF trades.

Use limit orders

Limit orders let you determine the maximum or minimum price at which you'll execute an ETF trade. While limit orders offer you control over price, there is always some risk that your order won't be fully executed.

Market orders can be effective when you're buying or selling ETFs with significant liquidity and narrow spreads. However, since the overriding objective of a market order is trade execution rather than price protection, it's possible you will receive an undesirable price for your trade.

Consider market volatility

Be wary during volatile periods or when there are major events that affect markets. Market volatility can cause the prices of an ETF's underlying securities to move sharply, which can in turn cause the ETF's shares to have wider bid-ask spreads or larger premiums or discounts. Limit orders may be beneficial in such situations because of the price protection they provide.

Keep abreast of the news

Investors should pay attention to market news as ETF prices may swing in response to the release of economic indicators or statements from central banks, as well as earnings and other news from companies that are large constituents of an ETF.

Understand liquidity

A common misconception is that ETFs with lower average daily volume (ADV) are not as liquid as other ETFs in the marketplace. ADV is generally a good gauge of liquidity for a single stock because the number of its outstanding shares is generally fixed. However, ETF shares can be created or redeemed through an authorized participant, so the liquidity of the ETF's underlying securities is what matters most. When the underlying securities are difficult to trade, it can result in a wider bid-ask spread for the ETF. Learn more.

Heed the clock and the calendar

Spreads can widen at certain times each day or on certain days of the year.

At market open, some of an ETF's underlying securities may not have begun trading, which means a market maker can't price the ETF with certainty.

At market close, fewer firms may make markets in an ETF as market participants try to limit their risk, so fewer shares may be listed for purchase and sale than at other times of the day. When international markets are closed, spreads can widen for ETFs that invest primarily in securities that trade on exchanges overseas. If you're trading an ETF that invests internationally, know the market holidays of the relevant overseas exchanges.

Use a block desk. A block desk, if one is available to you, can use various trading tools to help you source liquidity for a large order.

Tips for trading international ETFs

In general, it's better to trade international ETFs when the underlying local markets are open. Because ETF values are based on the prices of their underlying securities, the prices of international ETFs tend to be closer to their real-time NAVs when their respective markets are open. For example, if you're trading an ETF that invests in European securities, you often will see narrower spreads and/or premiums/discounts and prices closer to real-time NAVs during the morning trading hours in Mexico, when the underlying securities are still trading in their local markets, versus the afternoon trading hours, when the local markets are closed.


ETF underlying securities are open for trading at different times


Source: Vanguard. The graphic is shown for illustrative purposes only and shall not be construed as a recommendation to buy or sell any security or financial instrument, or an offer or recommendation to participate in any particular trading or investment strategy.

ETF fundamentals