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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.
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.
3.
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.
4.
When is the best time to purchase or sell an exchange-traded fund?
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When the market for the ETFs underlying securities are trading efficiently. The best time to trade will vary for different asset classes. Generally, an ETF will trade most efficiently when the market for its underlying securities is operating efficiently. Also, ETF markets tend to perform slightly worse near the market open and close, which is when the market may experience more volatility.
5.
Which type of order will sell a position at a specified price only once a predetermined limit (stop) has been triggered?
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Stop-limit. A stop-limit order becomes a limit order once a stop has been triggered.