6 Tips for Trading ETFs in Volatile Markets

Looking to make an ETF trade? Here are some best practices to consider in volatile market

Considering an ETF trade? Here are some best practices for investors looking to execute trades during times of market volatility:

1) Use limit orders
Limit orders offer advantages over market orders, as these provide certainty on the trade price by preventing purchase (with a buy limit order) or sale (with a sell limit order) unless the price meets your requirements. A market order may be effective when placing small trades in highly liquid ETFs, but there is a risk that it could be executed at an undesirable price. A limit order, however, sets the price at which you are willing to transact. The closer your price is to the bid or ask, the greater the probability that your sell or buy will be executed. The use of a limit order is not without risk, as your trade may not be executable at the specified price.

2) Don’t trade near the market open 
In general, it may be prudent to avoid trading within the first and last 15 minutes of the trading day. Not all of an ETF’s underlying securities may have started trading within the first few minutes of the session, in which case the market maker1 cannot accurately price the ETF. 

3) Watch for volatility
Increased market volatility in underlying securities prices may result in the widening of an ETF’s bid-ask spreads, causing the ETF to trade at a larger premium or discount. In these fast-paced environments, seeking trading assistance maybe be prudent and investors are should consider using limit orders. 

4) Consider spreads, not volume
An ETF with substantial trading volume may appear to offer superior liquidity, but it’s not always the best measure. An ETF’s historical and current bid-ask spread may be a better indicator of liquidity because it includes the liquidity of its underlying securities.

5) Use bid and asks to determine current market price
Using the price of the last trade can be problematic, as the data may be stale and not representative of the current market environment. The current bid and ask prices better reflect the fair value of any security. In particular, the bid and ask prices offered by market makers are representative of the weighted average of the basket of securities in the ETF itself. Be aware that the market maker (see “who is a market maker” below) bid-ask may not be the top of book bid-ask. The market maker bid-ask spread serves as goal posts to manage the price of the ETF. Other buyers and sellers in the market are usually within this range.

6) Watch the clock for international ETFs
If possible, it may be preferable to trade international ETFs during the trading hours of the underlying securities. Prices of international ETFs traded in the US tend to be closer to the value of the underlying securities (with a narrower bid-ask spread) when their respective markets are open and overlap with domestic trading hours. Note that Asia-Pacific markets are always closed during North American trading hours. Most European markets close between 11:00 a.m. and 11:30 a.m. Eastern Time. The closing bell does not stem the flow of information that can affect the value of foreign-listed securities. A price of an NYSE-listed international ETF whose local market is closed may reflect new information with the potential to change the premium or discount relative to the ETF’s stated NAV, which reflects the last quoted prices of the underlying securities.

Interested in learning more about ETFs? Explore some of their tax advantages here. Explore Invesco’s full ETF offering here


  • 1 Who is a market maker? A market maker is an individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices it displays in its exchange's trading system, with the primary goal of profiting on the bid-ask spread, which is the amount by which the ask price exceeds the bid price a market asset. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid.
success failure

Get regular updates on factor performance

Discover how each factor performs in different market environments and gain helpful insights from our investment teams.

By clicking "sign up," you confirm that you are a financial professional and would like to be contacted by Invesco.