Trading ETFs: Market Orders vs. Limit Orders and More
From when to use market and limit orders to how market volatility affects bid/ask spreads, we share some tips that may improve your ETF trade outcomes.
Money flowing into exchange-traded funds (ETFs) seems to keep defying gravity. And the surging demand for actively managed ETFs shows clients’ growing preference for strategies that can potentially offer better returns than passive strategies as well as risk and tax management.
However, factors beyond record fund inflows are driving up ETF trading activity. Even during periods of market volatility, we see ETF trading related to tax-loss harvesting, portfolio rebalancing and reallocations.
At 2.4 billion shares, [2024] ETF volumes remained elevated to historical levels, +5.8% year-over-year, and represented 19.6% of total equity market volumes.¹
If ETFs are your choice of investment vehicle, here are some tips to help you trade more strategically.
Using the Right Trading Order to Your Advantage
While market orders tend to be the default order type for stocks and bonds, limit orders may give you the upper hand when trading ETFs—especially in volatile markets.
That said, choosing a market or limit order depends on several factors, including your trading goals, the specific fund being traded and current market conditions.
Let’s look more closely at the difference between a market order and a limit order.
Market Orders: Executing Quickly at the Best Available Price
When you need quick execution and fluctuating prices are not an issue, market orders will get the job done, though there could be unexpected outcomes. The market order simply tells your broker to buy or sell a security at the current market price for immediate execution.
The broker typically executes promptly at the best available price when the order is placed. The best available price to complete the size of your order could be much higher than the price currently showing on screen.
But what happens on days market conditions change quickly on unexpected news, when the asset prices of even the larger-volume ETFs can fall out of line? When volatility strikes, the price you saw when you placed a market order and the price you actually paid upon execution could be vastly different.
Market orders are always vulnerable to changing market conditions. Consider the following example that shows trading 1,000 shares of ABC ETF in a relatively stable versus a more volatile market environment.
How a Market Order Can Cost You in Volatile Markets
1,000 Shares of ABC ETF, Current Ask Price $50 Per Share
Stable Market | Volatile Market |
|---|---|
The trade executes at the best available market price at the time. In this case, the price is $50 per share. | The trade executes at the best available market price at the time for the size of the order. In this case, the prices moves, and the trade is executed at $51.50 per share. The order still gets done but now at a higher price. |
Total Cost: $50,000 | Total Cost: $51,500 |
Did you or your client expect to pay at most $50,000? In situations where you want to minimize the impact of the trade price versus the price initially seen on the screen, a limit order is a better option.
Limit Orders: Controlling the Execution Price
A limit order lets you set the purchase or sell price for a security. The trade is executed only if the market price reaches or is better than the set limit price.
Because a limit order puts price before execution, you may have to wait longer for a trade to execute, particularly if quotes rapidly change throughout a trading day—but it’s also cost protection if the share price suddenly moves. Additionally, a limit order allows you to assess markets in times of volatility and adjust your limit price accordingly.
How a Limit Order Works to Mitigate Price Volatility
Purchase of 1,000 Shares of ABC ETF, Current Ask Price $50 Per Share
Stable Market | Volatile Market |
|---|---|
The trade executes only if the ask price is $50 or lower. In this case, the price is $50 per share. | The trade executes only if the ask price is $50 or lower. In this case, the price moves to $50.50 per share. The order does not execute until the price returns to $50 or lower. |
Total Cost: $50,000 | Total Cost: $50,000 or lower |
In these examples, execution of the limit order occurs only if the ask price is $50 or lower, regardless of current market conditions.
If you entered a day-limit order, the order automatically expires at the end of the day.
A good-til-canceled (GTC) limit order is an order to buy or sell a stock that lasts until the order is completed or canceled. Brokerage firms may limit the time investors can leave a GTC order open. These limits can vary from broker to broker.
A savvy move with limit orders for ETFs is to set your price a penny or two above the best offer being shown if buying or below the best bid if selling. This increases the likelihood that the order is fulfilled. If there is room for price improvement, the trade executes at the improved price.
How Limit Orders Can Expand Your ETF Trading Options
Limit orders are appropriate whenever you trade ETFs, from large to small trades.
ETFs’ multiple layers of liquidity let you trade ETFs in amounts that can far exceed an ETF’s average daily volume without significantly affecting the ETF’s price. You can fully access liquidity by providing a limit order to your broker to buy or sell ETF shares at a price beyond the on-screen volume.
(For large trades, you should always reach out to your broker’s ETF block desk. The general rule of thumb is that the block desk should be used for orders that are 2%-3% of the average daily volume or $500,000 in value, whichever is smaller.)
Limit orders also expand the universe available to you to fine-tune exposures and meet clients’ needs. Currently, roughly 10% of ETFs on the market account for 91% of trading volume in ETFs.*
But there’s no reason to overlook a lower-volume ETF with a wider spread than a penny if you believe it’s a better fit for the overall portfolio allocation.
Why Experienced Traders Use Limit Orders More Than Market Orders
While some investors are more comfortable with price uncertainty than others, a limit order puts price control in your hands.
If you want to protect the price of your ETF trade, use a limit order—even if the ETF has high volume. Yes, submitting a limit order may take a few seconds longer than a market order, but you have control over the execution price (although there's no guarantee the order will be filled). As I see it, a limit order has your back if market conditions suddenly change.
Market Order vs. Limit Order Key Considerations
Trade execution priority: Market orders prioritize immediate execution, while limit orders prioritize price control. Market orders can be used when speed is paramount for smaller trades and price is not an issue.
Volatility and uncertainty: When there is a high degree of uncertainty or volatility in the markets, market orders may lead to significant price slippage—when the execution price deviates substantially from the expected price. Limit orders help mitigate that risk by allowing you to set specific price thresholds.
Time sensitivity: Market orders typically are executed faster, making them suitable for time-sensitive situations. The investor will pay whatever price the trader fills the order. Trades may occur at prices significantly beyond the price shown on screen.
On the other hand, limit orders require more patience for trades to execute at the specified limit price and acceptance that the order may not be filled. Furthermore, you may need to adjust the limit order price based on the volatility during the time the order is placed.
Risk tolerance: Market orders carry a higher risk of price fluctuations, while limit orders provide greater control over the execution price. Risk-averse investors may opt for limit orders to minimize potential adverse price movements.
Trading Volatility and the ETF Bid/Ask Spread
Uncertainty leads to market volatility—and wider spreads between the bid and ask prices you see on the screen as market makers look to control their risk during periods of rapid price fluctuations.
Bid price – the highest price a buyer is willing to pay.
Ask price – the lowest price a seller is willing to accept.
ETFs can still provide efficient market access even in volatile markets. Taking a few extra steps when placing your ETF trade gives you greater price control in volatile markets (and is a good practice anytime you’re implementing ETF investment decisions).
Beware of Trading When the Markets Open and Close
ETF portfolios are often made up of many securities that don’t necessarily open the moment the market opens or resume trading after a pause. These variations can lead to pricing inefficiencies, causing the differences between the buy and sell prices to increase. Extreme market volatility can make those spreads even wider.
It’s common practice to wait 15 minutes after markets open or resume trading after a triggered market wide circuit breaker. This allows time for the underlying securities to open and trade, providing greater price transparency for the market makers to efficiently quote the ETF.
ETF spreads can also widen toward the end of a trading session, especially in times of market stress. This can happen because it is more difficult for market makers to hedge positions going into the market close.
If you need to trade near the end of a trading session, consider placing orders at least 15 minutes before the market close. The size and depth of the ETF market may be better at that time.
Use a Block Desk
The block desk is one of your best resources to attain best execution on an ETF trade—whatever the size. Block desks include the institutional desk at an advisor platform, the ETF desk at a broker dealer or the trading hotline of a retail platform.
For large trades, traders on the desk can source shares in both the secondary and primary market. It can also trade in increments to manage the effect the trade could have on prices or obtain a quote to execute the entire trade.
On smaller orders and lower-volume ETFs, the block desk may find that it’s a better trading strategy for the advisor to go through the desk rather than directly into the market.
Develop a relationship with your custodian’s institutional trading desk. Here are ways the traders can help you efficiently trade ETFs:
- Talk through specific size minimums or requirements before sending the trade.
- Identify the best way to submit the trade so that it goes to the block desk.
- Discuss technology requirements for submitting trades.
Note: Some desks charge a fee to place a trade.
You are not alone when trading ETFs. From large to small trades to navigating market volatility, take advantage of the ETF community of professionals and the resources and tools we can provide. Our jobs are to support advisors in fulfilling their clients’ needs.
ETF Trading Tips: Your Guide to Common Order Types
There are a variety of order types at your disposal. Each order type serves a distinct purpose and has considerations that can result in different outcomes for your clients.
Keep this reference guide handy for a quick review before entering ETF trades.
Order Type | Description | Price Control? | Guaranteed Execution? | Suitable for Block Trades? |
|---|---|---|---|---|
Market | Buy/sell executed immediately. | No | Yes | No |
Not recommended for ETF block trades or even smaller ETF trades, given no price control. Guaranteed execution and speed of execution are the main benefits of market orders.
Limit | Buy/sell executed at predetermined price. | Yes | No | Yes |
Recommended for both block trades and smaller ETF trades, given full price control. A buy order will only go off at the trigger price or lower, and a sell order will only go off at the trigger price or higher.
Held | Buy/sell executed immediately. | No | Yes | No |
A held order is the same as a market order and is not recommended for ETF trades.
Market not held** | Order goes to a floor broker or an institutional trade desk that has both time and price discretion for execution. This usually involves getting a block desk involved. | Partial | Yes | Yes |
Recommended for large ETF trades, as the broker assesses the market to achieve efficient execution and generally requests quotes from more than one ETF liquidity provider to execute at the best price.
Limit not held** | Order goes to a floor broker or block desk that has time and price discretion for execution, with a predefined lower limit on sells and an upper limit on buys. | Partial | No | Yes |
Similar to market not-held orders with added price control from the limit order price protection. Also recommended for large ETF trades, with the slight risk of not being executed if the only offers from the liquidity providers are outside of the limits given to the floor broker.
Stop | Predetermined price set. Once the market is at the set price or breaks through, it becomes a market order. | Partial | No | No |
Not recommended for ETF trades because the order becomes a market order once the trigger price is met, putting you at risk of market moves.
Stop limit | Predetermined price set. Once the market is at the set price or breaks through, it becomes a limit order. | Yes | No | Yes |
Recommended for large ETF trades, as it becomes a limit order after the trigger price is met, providing full price control.
**Most advisor platforms have institutional desk available to assist in trading securities.
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SIFMA (Securities Industry and Financial Markets Association), Equity Market Structure Compendium. February 2025.
Source: Bloomberg, American Century Investments 08/31/2023.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.