You've decided to buy that hot exchange traded fund and can't wait for the market to openso you canplace your order.
X But read this first before you rush to put in your order. Many pundits will tell you it's best to avoid trading right when the market opens.
Stocks can be highly volatile right out of the gate — they can gap up or down sharplyon early news or the prior day's earnings report, distorting the prices. Since an ETF is a basket of stocks,it's often betterto give the underlying components a chance to settle.
"There is a general rule that says not to trade during the first or last 15 minutes of the day, in large part because of the higher volatility a stock can experience during these times," Bruce Bond, founder & CEO of Innovator Capital Management, told IBD. "This isn't an issue unique to ETFs. Since an ETF's value is derived from its underlying constituents, waiting for all constituents to open and their volatility to subside will create a better environment to buy or sell the ETF."
Likewise, you don't want to wait until right before the market closes, either. Big orders from institutional investors can cause temporary price distortions in both the underlying securities and the ETFs themselves, says Dave Nadig, CEO of ETF.com.So when is the ideal time?
"Middle of the day is generally best, and if there are international (European) securities in the ETF, trading in the morning will ensure you get prices closest to fair value," Nadig explains.
Now that you knowwhat time of day is best, let'slook at what kind oforder you're planningon. Market or limit?
If you want to execute the trade as quickly as possible, a market order is likely your better bet. However, if time isn't of the essence, industry experts say a limit order is almost always the best way to go.
"For most investors, quality of price received is more important than speed of execution," Bond said. "Using a market order will ensure you are executed very quickly, but you may not get the best price available. Using a limit order allows you to set a price at which you are willing to buy or sell."
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Nadig takes an even harder line. Hethinkslimit orders should essentially be mandatory for ETF investors.
"The only reason to place a market order — ever — is when you value speed of execution over price. Most investors aren't concerned with instantaneous fills, so putting a limit order in can minimize the chances of surprise," he said. "Even if you put in a marketable limit— say an offer to buy an ETF at 24 when it's on screen for 23.50, you ensure that if the market suddenly ramps, you don't end up paying MORE than the 24.Your marketable-limit won't mean you overpay if the fair price is 23.50, it will just mean you don't get run up if something happens."
Innovator, which partnered with IBD on the Innovator IBD 50 Fund (FFTY) and Innovator IBD ETF Leaders (LDRS), has seen heavy early volume across nearly every ETF that trades regularly each day.
FFTY, which launched in April 2015, has attracted more than $375 million in assets. It's returned 32.1% over the past year as of Feb. 16, according to Morningstar Direct, well ahead of the S&P 500's 18.7% gain. The fund isclose to retaking its 50-day moving average. A solid rebound off the line could mark a new buy opportunity.
Bond cites IBD 50 outperformance vs. the broader market andincreased awareness of FFTY among reasons for recent increased interest in the ETF.
"Investors also find value in the high-conviction nature of FFTY," he said."Unlike many ETFs or mutual funds that provide broad market exposure and rebalance on a quarterly basis, FFTY screens all U.S. listed securities, selecting only the top 50 stocks while rebalancing each week."
Abiomed (ABMD), Netflix (NFLX) and Nvidia (NVDA) were among its top holdings as of Feb. 16.
LDRS has gathered $60.2 million since its Dec. 21 launch. The ETF's top holdings as of Feb. 16 include SPDR S&P Metals & Mining (XME), ARK Web x.0 (ARKW) and First Trust Dow Jones Internet Index (FDN).
You can trade the IBD 50 with just one transaction via the Innovator IBD 50 ETF (FFTY), managed by Innovator Capital Management.
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