As exchange traded funds (ETFs) become a mainstream investment
tool, more everyday investors and advisors are utilizing ETFs in
portfolio compositions to maximize potential gains in an efficient
to Gary L. Gastineau for RIA Biz
, the more you use and trade ETFs, the more you need to ensure
you're using them efficiently and not racking up costs that gobble
up your returns. [
More Advisors Are Putting ETFs to Work.
This is even more important if you're an advisor more used to
trading mutual funds. Such trades don't have much of an impact on
the net asset value (
), whereas trades in ETFs can and do.
Gastinaeu provides three important principles for minimizing
Monitor and measure the cost of trades
. Tradings costs generally equal half the spread between the bid
and offer, plus commissions and any potential market impacts if
trades are large enough to affect the market. Wide bid/ask
spreads or significant market impacts could increase total
- Don't use market-on-close orders.
- Use limit orders - not market orders. Limit orders allow you
to specify the price at which you'll buy or sell; market orders
are orders to sell at the current price and it may not always be
favorable to you.
Another smart way to minimize costs is to have a strict buy and
sell discipline. We often hear from our readers that investing
opportunities we cover are popular and useful, but something we
hear even more is the
value of our exit strategy
, which you can read about and learn how to implement here.
Gastineau offers more great tips for buying and selling beyond
what we've covered here.
over to read it if you want more
For more information on ETFs, visit our
Max Chen contributed to this article