Placing ETF Orders
Types of Trades
A limit order provides more control over the execution price, but unlike market orders, limit orders are not guaranteed and your trade may not be filled.
Market Order - A market order is an order to buy at the next
available price. Market orders are guaranteed to be executed.
Limit Order - With a limit order, you specify the maximum
price you are willing to pay per share, but if shares never
become available at that price, your order will not be filled.
Stop Loss Order - A stop loss is an
order to sell at the next market price
if an ETF falls below a given price. For
example, if you could place a stop loss
order on a $50 ETF at $47.50. If the
price stays above $47.50, you continue
to hold the ETF. If it drops below that
price, though, your position is sold as
a market order. Realize that if the ETF
gaps lower, you will trade at the next
available level which may be well below
your intended stop price.
Q. What Type of Order Should I Place?
A. Relatively small trades (less than 300 shares) are
generally best placed as market orders. For larger trades,
consider a limit order which provides more control over
the execution price.
Consider the spread between the bid price and the ask
price. If the spread is less than $0.10, it may be easier to
simply place a market order and know your order will be
executed. But if the spread is larger, consider a limit order.
When you place a limit order, you specify the maximum
price you are willing to pay per share. If, for example, an
ETF is trading at bid $25 and ask $26, you could place a
limit order for $25.50.
By using limit orders, you control your maximum price per
share – assuming your order is filled. Unlike market orders,
limit orders are not guaranteed. They are placed only if the
security is available at no more than the limit order price; if
the ETF continues to trade above your limit price, your trade
won’t be executed.
Q. Should I Use Stop Losses with ETFs?
A. In Upgrading, we use our ranking system to determine
when to sell a fund or an ETF, not fluctuations in share price.
A stop loss sounds good in theory, since
every investor wants to limit losses. But
if your shares are sold, you’ll then need
to decide when and how to get back
into the market. And if you buy back
in at the same price you sold, you’ll still
pay a commission for both the buy and
sell and likely some spread.
Many investors wait to see that “the
trend has turned up” before buying
back in, and this may result in sitting on
cash while the ETF regains ground and
heads higher. We believe that over time
you will do better by simply Upgrading.
Q. Trading ETFs seems complicated. Do I have to use them?
A. ETFs are rarely the only option, even for active traders:
ProFunds and Rydex funds have minimal restrictions and
many brokers will waive their redemption requirements
for these funds as well. Check with your broker to confirm
their policy.
Our Upgrading strategy works whether you use both
exchanged traded funds and mutual funds (as shown in
NoLoad FundX) or whether you limit your portfolios to
either exchange traded funds or mutual funds. In most of
our portfolios, we use a mix of funds and ETFs based on
what is highly ranked.