• ETF Insights

    ETF 104: Getting the Most Out of Your ETF Trades

    07 October 2019

    By sticking to some important trading best practices, investors can ensure they are executing trades in the most cost-efficient manner possible.

    ETF 101: Understanding the Basics
    ETF 102: The Inner Workings of ETF Creations and Redemptions
    ETF 103: Is This ETF Right for Your Portfolio?
    ETF 104: Getting the Most Out of Your ETF Trades
    ETF 105: Gaining Efficient Access to Bond Markets with Fixed Income ETFs

    An Overview of the Secondary Market

    To understand why some orders can deliver better trading outcomes than others, you need to understand the mechanics of the secondary market. The secondary market serves as an initial layer of liquidity where investors buy and sell shares of ETFs. The primary market is an additional source of liquidity where in some instances, large blocks of certain ETF shares are created and redeemed. Primary market transactions may be triggered by a surplus in supply or demand for ETF shares.

    Market makers maintain order in financial markets by acting as intermediaries between buyers and sellers on exchanges. In the secondary market, for every individual security, market makers post bids, or the prices they are willing to pay to buy the security, and offers (also known as “asks”), or the prices at which they are willing to sell the security. The difference between the bid and the offer is known as the bid-offer spread[1].

    For any given ETF, there are typically multiple market makers in the secondary market, posting multiple “layers” of bids and offers with specific sizes. Market makers usually refrain from posting outsized large bid/offer share sizes for a variety of reasons – one of which is capital constraints. However, the definition of “outsized” will vary from product to product depending on its secondary market liquidity. The resulting bids and order create an order book which may look something like Figure 1.

    Figure 1: Market Makers and the Secondary Market

    Size Bid   Ask Size Total
    100 100 $22.21      $22.23           100           100
    2,500 2,400 $22.07   $22.28 2,400 2,500
    2,700 200 $22.05   $22.29 200 2,700
    2,900 200 $22.02   $22.31 200 2,900
    5,300 2,400 $22.00   $22.34 2,400 5,300
    5,500 200 $21.95   $22.35 200 5,500
    5,600 100 $21.90   $22.40 2,400 7,900
    5,700 100 $21.85   $22.42 200 8,100
    5,800 100 $21.80   $22.50 1,900 10,000

    Market makers on the secondary market post differently sized offers at a variety of prices.

    Use Limit Orders and Avoid Market Orders: What’s the Difference?

    An important first step in getting the most out of ETF trades is to familiarise yourself with the different ways trades can be executed. Four of the most common order types are summarised in Figure 2 below.

    Figure 2: Order Types: Market, Limit, Stop, Stop-Limit Orders

    Order Types: Market, Limit, Stop, Stop-Limit Orders

    Generally speaking, investors should use limit orders whenever possible instead of market orders. This is because limit orders offer greater price control, which can result in more cost-effective trades.

    Referring to the order book in Figure 1 on the previous page, it quickly becomes apparent why a market order may not provide the most cost-efficient trade. A market order to buy 10,000 shares of this ETF would execute 100 shares at $22.23 (leaving 9,900 shares left to purchase), 2,400 shares at $22.28, 200 shares at $22.29, and so on down the list of available layers of liquidity until the entire order is filled, at a much higher average purchase price than the lowest ask/offer. The weighted average price for a trade executed via a market order would be $22.37, which is 63bps worse than the top layer of the book. Even though the top layer shows a $0.02 bid-offer spread, which may appear tight, notice the lack of “depth”, or shares behind those quotes – another element to be mindful of as it relates to a fund’s secondary market trading.

    This is where one can see some of the benefits of limit orders. Imagine that instead of placing a market order, an investor placed a limit buy order for 10,000 shares at $22.24 (4.5bps of impact) for the same ETF as in the first example. The first 100 shares of the order would immediately execute, leaving 9,900 shares remaining. Market makers would then have more time to complete the order at the limit order’s specified price, which may result in a lower average purchase price for the investor. In many instances, there may be additional liquidity available that a market maker chose not to display. Limit orders may give market makers a chance to post additional liquidity at the buyer’s limit price which in turn provides more control over the execution price for the buyer.

    Pay Attention: Monitoring Market Conditions

    To help ensure a more cost-efficient ETF trading experience, it’s important to pay close attention to overall market conditions. The behavior of futures markets before the market opens can be a helpful indicator of what lies ahead in terms of volatility. On days characterised by significant volatility, exercise caution as heightened volatility usually results in wider bid-offer spreads, higher premiums[2] and discounts[3], and weaker ETF liquidity.

    Keep an Eye on the Clock: Avoid Trading During Certain Times of Day

    A lot can happen overnight, which is why ETF investors should generally avoid the first 30 minutes of the trading day. Breaking news, market activity, and morning economic releases all contribute to an early period of price discovery after market opening, often characterised by heightened stock volatility, wider spreads, and weaker liquidity. Afterwards, spreads tend to normalise and remain relatively stable for much of the remainder of the trading day.

    The World on Time: Overseas Markets and International ETFs

    Broad-based ETFs invest in securities that trade globally. Spreads on ETFs that hold these securities will be at their best when a majority of the underlying markets are open. Market makers can price ETFs with more certainty when the ETF and all or most of its underlying markets are trading, so look for spreads to widen if one or more of the markets that make up an index are on holiday or closed when the ETF is trading in Europe.

    For example, a US ETF (a fund with exposure to US markets) trading on a European exchange will trade better with a tighter spread later in the day when US markets open. This is because the liquidity of an ETF is usually dependent upon the ability of market makers to price and trade the ETF’s underlying securities, and market makers cannot access these underlying securities immediately when the underlying markets are closed.

    To help ensure more cost-effective trades in ETFs, investors should avoid volatile trading days, as heightened volatility can increase uncertainty. Investors should also keep an eye out for country-specific news that might cause volatility in a relevant foreign market. Extended holiday closures in markets may also have more substantial impacts on the ability of market makers to trade the ETF’s underlying securities.

    Key ETF Trading Takeaways

    Sticking to trading best practices can help investors make better decisions about when and how to execute trades. By avoiding certain times of the day, using limit orders instead of market orders, and paying attention to market-moving news, both domestically and in relevant markets, investors stand a better chance of making cost-effective trades at a fair price.

    ETF Trading Quick Reference Guide

    Pay Attention to Market Conditions  

    • Futures markets before market opening can be helpful indicators of volatility.
    • Use caution when trading on days characterised by significant volatility.
    • Market volatility usually results in wider ETF spreads and weaker ETF liquidity.

    Use Limit Orders

    • Use limit orders; a marketable limit order can be used to help ensure execution.
    • With a market order you lose price control; experienced portfolio managers generally trade with limit orders.

    Avoid Certain Days/Times

    • Market Open: Avoid the first 30 minutes of the trading day when ETFs are less liquid and spreads are wider.
    • Market Close: Overnight risk could deter some market makers from providing good liquidity.
    • Market Closures: International and bond market holidays may impact market makers’ abilities to value associated ETFs as well as create/redeem them.

    VanEck UCITS ETFs are available to trade in USD, GBP, EUR and CHF currencies on various European exchanges. For more information, please reference the relevant fact sheet or ETF page.


    [1] Bid-offer spread: also known as the “bid-ask spread.”

    [2] Premium: when an ETF’s share price trades at a higher amount than its net asset value (NAV).

    [3] Discount: when an ETF’s share price trades at a lower amount than its net asset value (NAV).

  • Important Disclosures

    This commentary originates from VanEck Investments Limited (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

    VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

    No investment advice

    The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for private use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

    Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

    Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors.

    Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.


    This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources.

    To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

    Limitation of liability

    VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

    Risk information

    The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments. 

    Conflicts of interest

    VanEck, its affiliates or staff of VanEck companies, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in this commentary.

    To limit possible conflicts of interest and counter the abuse of inside knowledge, the representatives, portfolio managers and analysts of VanEck are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of VanEck and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. This commentary has been prepared following the VanEck Conflict of Interest Policy. 

    Distribution restriction

    This commentary is not intended for, and must not be distributed to private customers.

    No part of this material may be reproduced in full or in part in any form, or referred to in any other publication without express written permission of VanEck. ©2019, VanEck.

    Index Descriptions

    All indices named in the commentary are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.


    VanEck Vectors UCITS ETFs plc. is an investment scheme which is registered in Ireland and which, as an umbrella fund, is subject to the European regulation of collective investment schemes under the UCITS Directive. The sales prospectuses for the VanEck Vectors UCITS ETFs contain a comprehensive description of the risks and conditions governing the fund. The sales prospectus, the Key Investor Information Document (KIID), the Articles of Association and the current annual and semi-annual reports are available free of charge from the following agents, contact details of whom may be found on www.vaneck.com.

    UK: Facilities Agent -- Computershare Investor Services PLC
    Germany: Information Agent -- VanEck (Europe) GmbH
    Spain: Designated Distributor -- Allfunds Bank S.A.
    Sweden: Paying Agent -- SEB Merchant Banking
    Swiss Represent: FIRST INDEPENDENT FUND SERVICES LTD, Klausstrasse 33, CH-8008 Zurich
    Paying Agent: Helvetische Bank AG Seefeldstrasse 215, CH-8008 Zurich

    In respect of the Shares distributed in Switzerland to Qualified Investors, the place performance and the place of jurisdiction is at the registered office of the Swiss representative.