Investors can purchase or sell ETFs the same way they trade any other security with an order sent to a broker.
However, ETFs have certain characteristics that make some order types more advantageous than others. Following are the three most common order types that an investor should understand before participating in the ETF market.
Market orders are the simplest and represent the default order at most brokerages. It is simply an order to buy or sell a security at the best available price in the market at that moment. The advantage of a market order is that the investor is guaranteed to buy or sell as quickly as possible, because market orders prioritize speed of execution. The disadvantage of a market order, however, is that the investor does not know exactly what price will be paid or received for that security. The market can change very quickly as rapid volatility and liquidity changes can influence the prevailing market price.
The price one receives or pays on market orders can, at times, be particularly unpredictable for ETFs due to event driven market volatility that may result from political or economic announcements, for example. When trading during these periods, a market order provides no protection to the investor.
A limit order is an order to buy or sell an ETF at a specified price. Unlike market orders, limit orders prioritize price over speed of execution. As their name implies, they enable investors to set a limit on the price of their purchase or sale. At the brokerage, limit orders are ranked according to price competiveness and counterparty market participants have access to the most preferable order first. Therefore, it is not guaranteed that a limit order will be executed in full or at all during the trading day.
Another risk of these orders is that investors may not be able to trade their security at all if they specify a non-competitive price.
However, when market volatility occurs, a limit order can provide some protection from unexpected political or economic announcements that may cause a significant change in an ETF's unit price.
A stop-loss order helps curb losses or protect gains by triggering a market order for an ETF once it reaches a specified unit price. Once the market hits this price, even if it is due to temporary market volatility, the ETF will be sold at the prevailing market price.
It is important to be aware that the stop-loss order is a longer-term conditional order that can stay in the market until it is filled or cancelled by the investor. The disadvantage is that once the stop-loss price is triggered, the sale price the investor realizes from the resulting market sell order may be lower than the unit price specified by the stop-loss order. However, the advantage of a stop-loss order is that it gives investors an automatic way to exit their positon once the specified price is reached.
|Market Order||Order is usually filled quickly||No control over the price at which the order is filled|
|Limit Order||Control over the price at which the order is filled||Chance the order will not be filled|
|Stop-Loss Order||Helps curb losses or protect gains||No control over the price at which the order is filled once the stop-loss price is triggered.|
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This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETF). Please read the prospectus or Fund Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by RBC Global Asset Management Inc., an indirect wholly-owned subsidiary of Royal Bank of Canada.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017