Esko Mickels, writing for Morningstar, came out with 10 tips for placing ETF orders. Why does he specifically relate these ordering tips to ETFs? Esco states, “Unlike mutual funds, ETFs have intraday liquidity, so the price at which they’re bought and sold can deviate from their net asset value (NAV). But unlike stocks, ETFs have a secondary source of liquidity: designated brokers (also known as “authorized participants”) are allowed to exchange the underlying basket for units with the fund company. This ability to create and destroy units limits the impact of large orders. It also means that liquidity ultimately rests in the underlying investments. The less liquid an ETF’s holdings are, the less liquid the ETF is likely to be.”
Below are his ten tips, click HERE for his full article with details on each tip.
- Avoid placing orders near the open and closerders during the first and last 30 minutes of trading.
- Use caution during volatile days
- Use limit orders for best execution
- Select ETFs with good liquidity
- Trade while the underlying market is open
- Consider using a stop-loss order
- Pay attention to transaction costs
- Be careful when using leveraged ETFs
- Consider the number of market makers
- Be mindful of the distribution date