How to Buy and Sell ETFs

Buying and selling ETFs is similar to trading stocks. You'll want to look at things like volume, liquidity and the bid/ask spread, all of which you can find in a Detailed Quote. An ETF Screener can help you find ETFs that might be right for you, or you can search for a specific ETF name or symbol if you already know it.

Let's look more closely at some common trading concepts and how they apply to ETFs.

Trading

Volume

ETFs have daily trading volumes, just like stocks do. Volume represents the number of units of that ETF that trade on any given day, which is influenced by the activity of investors — again like a stock. However, with ETFs, daily volume is often mistakenly used as a gauge for liquidity. Read on to find out why.

Liquidity

One of the most misunderstood aspects of ETFs is liquidity. Unlike with stocks, low trading volume with ETFs doesn't equate to low liquidity. An ETF's liquidity is determined by the liquidity of its underlying securities. If an ETF invests in securities that have limited supply or are difficult to trade, this may impact the market makers' ability to create or redeem units of the ETF, which in turn may affect a portfolio's liquidity.

Bid-ask spreads

An ETF's bid and ask prices will generally closely align with the value of the underlying securities held by the ETF. However, bid-ask spreads — the difference between the bid and ask prices — can be affected by:

1. Spreads on the underlying securities

Since an ETF is essentially a basket of securities, the spread on the ETF will reflect the spread on the underlying securities. If the underlying securities themselves are very liquid, the ETF should also be very liquid, and therefore have a small spread. An example of this could be large-cap U.S. stocks, which generally have high trading volumes and very narrow spreads. Asset classes that are not as liquid will have wider spreads.

2. Cost of assembling and trading

The cost of assembling and trading the securities that make up an ETF may impact the spread. For instance, if an ETF invests in foreign securities, there would be additional costs to convert Canadian dollars to the underlying currencies. An ETF that buys European dividend stocks first needs to buy pounds sterling, euros, Swiss francs and so on. Another example would be any regulatory costs and taxes.

3. Trading volumes

When an investor is making a very large purchase of an ETF, for more than the amount of inventory the market maker has for sale, the market maker may need to create more ETF units by buying substantial amounts of the underlying securities. This may involve having to pay higher asking prices to fill the orders — often referred to as "market impact costs."

4. Market risks

Bid-ask spreads can also widen during times of heightened market risk or increased market volatility. If market makers are required to take extra steps to facilitate their trades during periods of volatility, spreads of the underlying securities may be wider, which will mean wider spreads on the ETF.

For example, trading risk can arise during times when foreign markets are closed and Canadian markets are open since market makers wouldn't be able to buy more U.S. stocks if they needed to create more ETF units, nor would they be able to monitor the underlying prices of those securities directly.

Order Types

Order types for ETFs are in line with those for stocks. Find out more in "How to Buy and Sell a Stock" video.

Here's a cheat sheet of common order types.

	PRO	CON
Market order	Order is usually filled quickly.	No control over the price at which the order is filled.
Limit order	Control over the price at which the order is filled.	Chance the order will not be filled.
Stop or stop-limit orders	Helps curb losses or protect gains.	Stop orders: When triggered, no control over price at which the order is filled. Stop-limit orders: Better control over price when triggered, but not guaranteed in fast-moving markets.

Practice Trading ETFs

An RBC Direct Investing Practice Account is a zero-risk way to try out buying and selling ETFs and other types of investments. Find out more in Explore RBC Direct Investing With a Practice Account.

Remember, there are risks and benefits associated with any investment. It's a good idea to weigh both the risks and benefits when determining if any type of investment is right for you.

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