Every week I tell you about exchange traded funds (ETFs) that you can use for various investment purposes. You could be wondering, though, what's the best way to buy them. So in today's column I'll give you some practical information that will help you implement whatever ETF investment strategy you might want to pursue.
Professional investors make a distinction between portfolio management and trade execution. You might not be a professional, but you can still use the same thought process …
Portfolio management is when you make the decision to buy or sell a particular security. Normally there will be limits on the decision. For example, maybe you only want to buy the shares as long as the price is less than $50. Or perhaps you want to sell all of your shares and be completely out by the end of the month.
Trade execution comes after the portfolio decision. You've already decided what you're going to do; now you want to do it as cost-effectively as possible. Maybe you're willing to pay $50 a share, but you'd be even happier if you can get in at $49. Good execution helps make this happen.
The importance of execution is directly related to your time horizon. If you're planning to hold an ETF position for years, a few pennies on the entry and exit may not seem so important. However, those same pennies can add up quickly if you're moving in and out every week.
With that in mind, here are five suggestions to help improve your ETF trading results …
Trading Tip # 1:
Shop Around for Lower Commissions
Years ago, the only way to get into the stock market was through a broker, who charged dearly for his trouble. Now the story is different. You can bypass the smooth-talking salesman and buy stocks, mutual funds, and (best of all) ETFs online for a very small fee.
If you deal with a full-service broker, he'll probably try to justify his exorbitant paycheck by telling you his firm really "works" your orders to get the best price. If you're throwing around millions of dollars at a time, this may be true.
For the rest of us, you probably aren't getting any better execution than you would at a discount broker. In fact, you may do better at a discount broker that doesn't have a proprietary trading desk working against you.
These days it's not hard to find reputable discount brokerage firms with rates of $8-12 for a typical small trade. And there's really no reason to pay any more.
Trading Tip # 2:
Get Inside the Spread
If you look at an ETF quote during market hours, you'll probably see some numbers called "bid" and "ask." They may be quite different from the "last" trade price.
Bid and ask are the current market prices. The bid is the highest advertised price that you can get if you're selling right now.
