ETF Overview

Placing Market and Limit Orders

If you were to look at the components of an exchange traded fund (ETF), you would find a basket of underlying securities, much like a mutual fund. However, ETFs also share many characteristics with individual stocks, including intraday liquidity and the ability for investors to buy on margin and sell short.

The process for placing ETF orders is also the same as the process for stock orders, which means you should be aware of certain terminologies to ensure that you place your ETF order correctly. One of the most basic but important distinctions to make is understanding when to place a market order and when to place a limit order. Each has advantages and disadvantages, and the particular situation will dictate which one you choose.

Market orders

When a security trades frequently and in high volume, the price of that security tends to move in smaller steps than a security that trades infrequently and at lower volume. This security can still be volatile and swing dramatically in one direction or another, but it will do so incrementally. Actively traded securities will have a tight bid-ask spread, so when you place a market order you can be confident it will be filled quickly and at a price that accurately reflects current market sentiment.

But what if you placed a market order on a lightly traded security? There tends to be a wider bid-ask spread on infrequently traded securities, so the risk of placing a market order is that your market order may be filled at a price that is much higher than the bid (for a buy order) or much lower than the ask (for a sell order).

Limit orders

In the case of a thinly traded security, you might want to consider a limit order where you specify the maximum price at which you’re willing to buy or the minimum price at which you’re willing to sell.

Here’s an example: Security XYZ is trading at $12.80 and you want to buy 1,000 shares for your client. Through your research you determine that $12.35 is the top price you want to pay, so you place a limit order for 1,000 shares at $12.35. Your order will only be filled if the security falls to $12.35 or lower, subject to availability of shares.

This approach gives you control and certainty over the execution price, but leaves open the possibility that your order will not be filled. It may be a suitable strategy for illiquid securities with wide bid-ask spreads, and for fast-moving stocks where a matter of seconds can result in a drastically different price that you don’t want to pay or receive. That’s the benefit of placing a limit order.

Please contact your advisor or First Asset for more information about trading ETFs.

Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.