Four tips for trading ETFs

Don't forget what the "ET" in ETF stands for.

Ben Johnson, CFA 3 June, 2015 | 5:00PM
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Some investors gloss over the "ET" in ETF, failing to understand or appreciate what these two letters stand for and the implications of investing in a fund that trades like a stock. The exchange-traded nature of these funds is increasingly taken for granted as many of the largest ETFs trade at tight spreads in very narrow bands around their net asset values through most market conditions.

But not all ETFs are created equal from a liquidity perspective, and investors shouldn't take ETFs' liquidity for granted. Also, the market mechanisms that underpin the ETF ecosystem have experienced hiccups of varying magnitude, ranging from the "flash crash" to more recent episodes of lesser scope and impact. These events have served as painful reminders of why investors should exercise caution when buying and selling ETF shares. Here I provide four tips on how to best trade ETFs.

1) Use limit orders.

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About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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