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ETFs 114: Exchange-Traded Fund Best Practices

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1.
What trading practice keeps exchange-traded fund prices close to their net asset values?
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Arbitrage. With arbitrage, traders take advantage of the difference between the market price and the net asset value.
2.
Why are limit-orders the most effective type of orders to use with exchange-traded funds?
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They allow patient investors to receive the price they want. Limit orders give investors the greatest amount of flexibility in filling at the price the desire, if they are patient.
3.
Which practice DOES NOT stand to minimize costs when trading exchange-traded funds?
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Using market orders. High liquidity and trading near the middle of the day allow investors to capitalize on the thinnest bid/ask spreads, which minimizes costs.
4.
For domestic exchange-traded funds, the best time to trade is _______.
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The middle of the trading day.
5.
Bid-ask spreads on exchange-traded funds tend to be widest near _______.
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Market-open.