Ben Johnson, CFA, is director of global ETF research at Morningstar Inc., Chicago, which tracks 620,000 investment offerings. Morningstar.com
With exchange-traded fund (ETF) trades now commission-free at most brokerage firms, they make even more sense than investing in traditional mutual funds.
ETFs tend to cost less than traditional funds, are more tax-efficient and are more transparent about their holdings. But if you’re not careful with your choices, ETFs can wind up costing you a lot more.
One potential drawback: Since ETFs trade like stocks, the difference in their intraday price and the underlying value of their individual holdings (known as the net asset value) can vary throughout the course of the day, meaning that the price you get when you buy or sell shares can be dramatically different depending on when you trade. To get the best prices…
Avoid trading in the first and last 30 minutes of market hours, when the spread between an ETF’s price and its net asset value tends to be greatest.
Use limit orders. When you trade ETFs, your brokerage firm gets you the “market” price—the best price available at that moment. If you want more control over the share price, specify the price you want with a limit order.
For buy limit orders, the trade will be executed only at your limit price or lower. You also can set up a sell limit order, which means that a holding will be sold at your limit price or higher.
Trade ETFs that invest in foreign securities only when the underlying markets are open and the holdings are actively changing hands. Example: For the best price, trade Vanguard FTSE Europe ETF (VGK) during the morning while European markets are still open…though, as above, avoid the first and last 30 minutes of market hours.