The question
Does it matter when during the day I place a trade?
The idea
- This lesson describes trading conditions, not when to buy or sell.
- US exchanges trade from 9:30 a.m. to 4:00 p.m. Eastern time. Market makers (lesson 3) price each ETF from what it holds. When they can see that value clearly, the spread is narrow. When they can't, it widens.
- Three times when the holdings' value is hard to see:The first minutes after the open, before every holding has traded. ETF spreads are usually widest then, and in the last minutes before the close.When the holdings trade abroad, on markets closed during New York hours.Rough market days, when prices move fast.
Worked example
The 3 steps beside the drawing at the top work this through on ETFIQ data. Point at a step to light the part of the drawing it describes.
The common mistake
"The price at 9:31 is as good as the price at noon." In the first minutes many holdings have not traded, so quotes are wider. For a fund whose holdings trade in a closed market, the NAV you see is hours old all day. A limit order (lesson 2) sets the worst price you'll accept.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. When are ETF spreads usually widest?Answer: A. In the first minutes after the open and the last before the close. at the open, not every holding has a fresh price, so quotes are wider. Not B: midday, holdings are trading and prices are clearest.2. A fund holds only European stocks, whose markets close in the late morning, New York time. Big news hits European companies at 2 p.m. New York time. What happens?Answer: A. The ETF's price moves, while its NAV still reflects the morning's closing prices. the ETF keeps trading in New York; the NAV waits for Europe's next close, so a premium or discount appears. Not B: the ETF trades on a US exchange in US hours, whatever its holdings' markets do.3. On Aug 24, 2015, SPY was 7.8% down at 9:35 a.m. and closed 4.2% down. On a $10,000 holding, how far apart were those two sale prices?Answer: B. $360. 7.8% − 4.2% = 3.6 percentage points, and $10,000 × 0.036 = $360. Not C: $420 is the day's whole loss at the close, not the gap between the two times.
Takeaways
- The opening minutes, closed foreign markets and rough days make an ETF's price harder to read.
- For a fund holding foreign stocks, a gap to NAV is partly an out-of-date NAV; its Trading tab shows how wide it runs.