What are the best practices for trading ETFs?


Following these basic principles will help ensure that execution is as close to real-time net asset value (NAV) as possible when making trades for your clients.

Beware of the opening and close | more

Use caution when trading just after the market opens. It's often a good idea to allow some time to pass before trading in the morning and to avoid waiting until the last minute to wrap up your buy or sell orders in the afternoon.

As the market's close of 4 p.m., Eastern time, approaches, an ETF may experience wider spreads and more volatility as market participants begin to limit their risk.

Generally, choose limit orders, not market orders | more

Limit orders give you more control by letting you determine the maximum price at which you'll execute an ETF trade. However, depending on the price you set, there is some risk that your order won't be fully executed.

In situations in which ETFs have significant liquidity and very narrow spreads, market orders could be effective, but there is always a risk of poor execution. Market orders don't provide price protection since the overriding objective is to execute the trade.

Learn more about common order types

Be wary during volatile periods | more

Wide swings in the market can cause the prices of an ETF's underlying stocks to move sharply, causing the ETF to have wider bid-ask spreads or larger premiums and discounts.

Learn more about premiums and discounts

Keep an eye on liquidity | more

Typically, ETFs with substantial trading volume and narrow bid-ask spreads may appear to offer superior liquidity. However, average daily volume (ADV) is not the only gauge of an ETF's liquidity. You should also be mindful of the liquidity of the ETF's underlying securities, which is a factor that becomes more important as trade sizes increase.

An ETF with higher ADV does have its advantages. For example, investors who turn over an ETF in a short-term tactical allocation may be better off if the ETF has a higher ADV, assuming that the ETF provides the desired exposure.

Learn more about liquidity

Take advantage of your block desk | more

When trading large blocks of ETFs, you have a lot to lose if your trading decisions are poorly executed. That's why it's important to utilize all the tools available.

Your block desk can be indispensable in helping you get the best execution for your clients. Block-desk traders can handle your trades efficiently and have the ability to source sufficient liquidity by using a variety of trading strategies.

Your block desk is a trading resource that can save you time and help ensure better trade execution.

Learn more about placing orders through a block desk

Tips for trading international ETFs | more

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 a European ETF, you often will see narrower spreads and/or premiums/discounts and prices closer to real-time NAVs during the morning trading hours in the United States, when the underlying securities are still trading in their local markets, versus the afternoon trading hours, when the local markets are closed.

When local markets are closed, international markets tend to follow what happens in the U.S. market, and market makers frequently price U.S. market movements into the value of underlying ETF securities (known as fair-value pricing). The result is that large market swings can have a greater impact as a result of this fair-value pricing, with market makers using the U.S. market as a proxy for what may happen in the international markets. This can cause some tracking error.

All investing is subject to risk, including possible loss of principal.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

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