As the market braces for potential volatility in the coming days and weeks, it’s worth reviewing best practices for trading exchange traded funds (ETFs) during volatile markets.
Our first strategy is simple: If you do not have to trade during volatile times, we recommend that you do not. If you choose to buy or sell ETFs — or any other securities — during periods of heightened volatility, we recommend that you place your trades using limit orders.
A limit order identifies the maximum and minimum prices at which you want to buy or sell a security. Unlike market orders that execute immediately at the next price, limit orders do not guarantee execution. They do, however, provide control over price level and allow investors to manage execution risk, which is particularly useful when volatility spikes.
Limit orders generally aren’t necessary, although they are still encouraged, for very liquid ETFs — such as the SPDR® S&P 500® ETF (SPY) — where there are millions of shares offered at each price point with very narrow bid/ask spreads.1 However, limit orders can be a useful execution tool in less actively traded securities and, again, can help to reduce adverse price impact in times of market stress.
Additionally, there is typically heightened volume — as well as increased probability of volatility — at the open and close of each trading session, as markets work to absorb new information at the open and settle trading imbalances at the close. For this reason, we recommend not trading market-on-open (MOO) or market-on-close (MOC).
Exchange traded funds are known for their tradability, yet 83% of all US-listed ETFs trade less than $25M per day, on average.2 It’s therefore critically important to evaluate an ETF’s liquidity profile in addition to the market environment and your own trading objectives prior to making execution decisions. Here are some insights on how to optimize trade execution for ETFs of all levels of liquidity.
SSGA has a long-standing commitment to market quality in our ETFs and deep relationships within the trading community. As one of the industry’s largest ETF providers, we are committed to collaborating with the industry — including exchanges, issuers and other market participants — to deliver a high level of service to ETF investors in all market environments. Our SPDR Capital Markets Group is in regular communication with market makers, exchanges and liquidity providers in an effort to monitor the liquidity of our products for the benefit of our clients and investors. Should you have any questions on ETF trading in general or during bouts of volatility, please contact us.
1 Bloomberg Finance, L.P., as of November 2, 2020. 2 Bloomberg Finance, L.P., as of November 2, 2020.
The views expressed in this material are the views of SPDR Americas Research through the period ended November 3rd, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk, including the risk of loss of principal. Past performance is no guarantee of future results.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
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