Similar to a mutual fund, ETFs can provide access to a diversified mix of stocks or bonds in a single investment, but you can trade them like a stock on an exchange. In this article, we share tips to consider when buying and selling ETFs.
•   Market order: Simple, efficient, but use wisely
Market orders are the simplest and represent the default order at most brokerages. It is simply an order to buy or sell an ETF at the best available price in the market at that moment.
Pro: You can buy or sell as quickly as possible, because market orders prioritize speed of execution.
Con: You do not know exactly what price you will pay or receive for the ETF. The market can change very quickly.
The price you receive or pay on market orders can, at times, be particularly unpredictable. Prices on the stock market can change quickly in response to political events or economic news, for example. When trading during these periods, a market order provides no protection to you, the investor.
•   Limit order: Gives you control, but may not be filled
A limit order is an order to buy or sell an ETF at a specified price. Unlike market orders, limit orders prioritize price over speed of execution. As their name implies, they enable investors to set a limit on the price of their purchase or sale. At the brokerage, limit orders are ranked according to price competitiveness,with the highest bid/lowest ask ranked first. Therefore, it is not guaranteed that a limit order will be executed in full or at all during the trading day.
Another risk of these orders is that investors may not be able to trade their security at all if they specify a non-competitive price.
However, when market volatility occurs, a limit order can provide some protection from unexpected political or economic announcements that may cause a significant change in an ETF's unit price.
•   Stop-loss order: Some downside protection, but volatility can undermine
The stop-loss order is a longer-term conditional order. The order can stay in the market until it is filled or cancelled by the investor.
Pro: A stop-loss order helps curb losses or protect gains by triggering a market order for an ETF once it reaches a specified unit price. Once the market hits this price, even if it is due to temporary market volatility, the ETF will be sold. The advantage of a stop-loss order is that it gives you an automatic way to exit your position once the specified price is reached.
Con: The ETF price may drop temporarily, but once the stop-loss price is triggered, a sell order is automatically created. If the ETF bounces back up, you do not get to take advantage of the higher price.
ETF prices may change significantly throughout the market trading day, especially in response to key economic announcements or geopolitical events. This means the bid-ask spreads of the ETF may widen.
The bid is the price that someone is willing to pay for an ETF. The ask is the price someone is willing to accept to sell an ETF. Learn more about bid-ask spreads
When the bid-ask spread is wide, a limit order can help with pricing an ETF. For an ETF buyer, the limit buy order is only executed if the ETF falls below a certain price. Conversely, a sell limit order is executed when the ETF rises above a certain price. This way the ETF buyer/seller gets a price that they are comfortable with.
ETF markets are often volatile after they have just open or are about to close. This is because the first and last period of the market trading day are often the busiest and this can cause significant price swings. Typically, after the rush, ETF prices tend to smooth out (i.e. bid and ask price spread narrows).
For more information about ETF investing, visit ourETF Learning Centre.
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