How to trade ETF — Guide for beginners

One of the important features of ETFs is that an ordinary investor can only buy this instrument on the stock exchange. In this regard, it is necessary to take into account many issues related to the implementation of transactions on both Russian and foreign exchanges. You can learn more about ETF trading through ETF articles Day Trading for beginners and What is an ETF – Guide for beginners. This article below provides some tips for a private investor on what to consider when buying and selling ETFs.

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Use limit orders

Use limit orders when conducting transactions with ETFs. Investors, as a rule, use market orders in those cases where the speed of the transaction is significant for them, and the price of the transaction, on the contrary, is not so important.

Investors using market orders want to complete the deal as soon as possible. For the largest and most liquid how to trade ETF that trade very close to the value of their underlying securities, such as the SPDR S&P 500 ETF (SPY), market orders are likely to lead to fast execution of the transaction at a good price. Also, such an ETF trading system may be traded with less matching value for their underlying securities.

Transact when a market is open in which ETF trading underlying assets are traded

If you intend to carry out transactions with ETFs that invest in securities ETF trading strategies in markets outside the United States, it is best to do this at a time when trading is open in local markets where these securities are traded. 

Do not carry out transactions the first time after the opening or immediately before the closing of the market

It is better to avoid transactions with ETFs immediately after the opening of trading on the exchange: in the morning, the ETF trading system may take some time to “wake up.” For a number of reasons, a certain amount of time may elapse before all securities included in ETF assets are traded on the exchange (provided that these securities are traded during the normal hours of US stock exchanges). As a result, until the ETF trading on all securities included in ETF assets begins, market makers can insert wider spreads on ETFs to compensate for the uncertainty of current prices.

If you carry out a major transaction – use the “call a friend”

In general terms, a major transaction can be attributed to a deal that accounts for 20% of the average daily trading volume of this ETF trading or more than 1% of its total assets under management. In such cases, investors can potentially significantly save on transaction costs if they spend some time on a call to a market maker or representative of an ETF management company.

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If you do not need to carry out transactions on the stock exchange certainly, you can purchase mutual fund units

ETFs do not have to be used by absolutely everyone. The answer to the question “what to choose – ETF or an identical index mutual fund?” It can be reduced to the personal preferences and circumstances of the investor. If you do not attach much importance to the possibility of buying/selling an investment instrument during a trading day, and you prefer to refuse to gain access to ETF trading strategies on the stock exchange and to conduct transactions on it, then an index mutual fund tracking the same index as ETF, it may well be your best bet. Today, nearly a quarter of a century later, ETFs can be found in most portfolios, from five-digit retail investor accounts to multi-billion dollar accounts of institutional money managers.

The exponential growth of ETFs can be explained by their many advantages, such as relatively low cost, transparency, tax efficiency, and liquidity.

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