Volatile markets seem to be the norm these days. Despite the uncertainty, investors may still be making important investment decisions like tax loss harvesting or reallocating their investment portfolio.
Investors are increasingly using exchange-traded funds (ETFs) when implementing those portfolio decisions. This continues despite the recent volatility. In fact, we have seen a significant increase in ETF volumes over the past few weeks. If ETFs are your choice of investment vehicle, now is a good time to understand the following key tips on ETF trading.
Use Limit Orders
When markets move quickly, limit orders can help set the price at which you would like to trade your ETF. Limit orders take a few extra steps to set up, but in return, they give you a layer of price control. In contrast, a typical market order will execute immediately at the available price. The executed market price may be away—sometimes significantly—from the current market depending on the size of trade you are looking to do. Remember, limit orders try to set a price while market orders only guarantee execution.
Limit orders are also different than stop-loss orders. The price you set for a stop-loss order is only the trigger price—not the execution price. If market prices are falling quickly, the gap between your trigger price and the execution price could be significant.
Instead, consider using limit orders with your stop-loss orders to help control the execution price. These stop limit orders may not execute immediately after the trigger price hits. Instead, the order will only execute if the price is at or above the limit price.
Note that in rapidly changing markets, limit orders may need to be adjusted over the course of the trading day as the current market price may move out of range of the limit price you have selected.
Leverage a Block Desk
If you have access to a block desk, consider contacting them before placing your trade. Block desks include the institutional desk at an advisor platform, the ETF desk at a broker dealer or the trading hotline of a retail platform. ETF trading specialists can help you find liquidity you need for your trade, especially if you are trying to execute a large ETF order.
Beware of Trading When the Market Opens or Resumes Trading After a Pause
ETF portfolios are often made up of many securities that don’t necessarily open the moment the market opens. These time differences can lead to pricing inefficiencies, causing the differences between the buy and sell prices (a.k.a. the “spread”) to increase. Extreme market volatility can make those spreads even wider.
Instead, it’s a common practice to wait 15 minutes after markets open or resume trading after a triggered market-wide circuit breaker. This allows time for the underlying securities to open and trade, providing greater price transparency to the ETF.
Be Cautious Trading at the End of the Day
ETF spreads can also widen toward the end of the trading session, especially in times of market stress. This can happen because it is more difficult for market makers to hedge positions going into the market close.
If you want to trade closer to the end of the trading session, consider placing orders five minutes before the market close. The size and depth of the ETF market may be better at that time.
Be Aware of Market Dynamics
Uncertainty leads to market volatility, and volatility can lead to wider ETF spreads. That said, ETFs can still provide efficient access to markets, even in times of market stress. We believe taking a few extra steps when placing your ETF trade can grant you greater price control in volatile markets—a good practice when implementing your ETF investment decisions.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.