Things to Consider When Trading Invesco QQQ

Blog Author

John Frank, CFA

Talking Points

1

There are multiple factors to consider when trading ETFs

2

Understand why expense ratio isn’t the only type of cost you should consider when trading ETFs

3

Invesco QQQ, as the second most traded ETF based on average daily volume traded within the United States, has long been considered one of the most liquid ETFs available to investors as of Dec. 31, 2018.1

Market performance

Unlike traditional funds, exchange-traded funds (ETFs) trade on an exchange. Similar to other securities traded on exchanges, ETFs can be traded throughout the day, not just after the market closes — so what times of the day should investors consider trading? It all comes down to bid-ask spreads.

Bid/ask spreads introduce a cost to transact. Historically bid/ask spreads have been higher during the open and close of markets, so investors wishing to lessen the impact of transaction costs might want to avoid trading ETFs during the open and close of an exchange, if possible. Additionally, investors of ETFs would be wise to consider order types other than market orders, such as limit and stop orders.While market orders guarantee trade execution, a limit or stop order only executes trades at prices determined by the investor ahead of time. These types of orders prevent trades executing at prices when the market moves against investors, whereas a market order does not provide this type of protection.

Costs are also an important consideration for ETF investors. Investors tend to gravitate to the lowest expense ratios for ETFs — but there are two potential pitfalls to focus exclusively on this. First, it’s important for investors to also compare underlying exposures and investment methodologies. It can easily be the case that the return differential between two funds that is the result of different exposures or methodologies offsets the difference in expense ratios. Second, there are other costs related to ETFs beyond expense ratios. Accounting for total cost of ownership, which includes expense ratios and trading costs, should be considered as well. As an example, consider two hypothetical funds, Fund A and Fund B. Fund A has an expense ratio of 20 basis points, while Fund B charges a lower expense ratio of 5 basis points. However, Fund A has better liquidity, and as a result, the total cost of a round trip trade (buy and sell) is 1.5 basis points versus 9 basis points for Fund B. If an investor makes two round-trip trades within the year, the total cost of the two funds is equal at 23 basis points. When the investor makes fewer than two round-trip trades, Fund B is cheaper. At more than two round-trip trades, Fund A is cheaper.

This hypothetical example is for illustration purposes only. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor

Invesco QQQ, as the second most traded ETF based on average daily volume traded within the United States, has long been considered one of the most liquid ETFs available to investors as of Dec. 31, 2018.1 The average bid/ask spread for Invesco QQQ, for the past five years, was 0.86 basis points.1 In fact, during the volatile month of December 2018, the average bid/ask spread was actually slightly lower at 0.75 basis points (1.5 basis points for a round-trip trade, to buy and sell). While its high levels of trading and low bid/ask spreads are not necessarily reason alone to consider Invesco QQQ, they are benefits that have historically led to low transaction costs for the ETF.

1. Source: Bloomberg L.P., as of Dec. 31, 2018.
Important Information Disclosure
Bid is an offer made to buy a security. Ask is the price a seller is willing to accept for a security. Bid/Ask spread is the amount by which the ask price exceeds the bid price for an asset in the market. Basis points, as known as bps, are a unit of measure. One basis point is equivalent to 0.01% or 0.0001 in decimal form. Market order is a request to buy or sell a security at the best-available price in the current market. Limit order is a request to buy or sell at a specified price or better. Stop order is a request to buy or sell when its price moves past a particular point that is a predetermined value. The Nasdaq-100 Index comprises the 100 largest non-financial companies traded on the Nasdaq. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs.

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