How to Buy or Sell an Exchange-Traded Fund

Mar 5, 2020
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SMI's core investment strategies regularly use exchange-traded funds (ETFs), so knowing how to buy and sell them is essential. Using ETFs isn't difficult, but there are some differences compared to buying or selling traditional mutual funds. The information below will guide you through the process.

In essence, ETFs are a subclass of mutual funds — they are similar to mutual funds in many ways but also different in some key ways. One main difference is when they may be traded.

Mutual funds are priced at the end of each trading day. So, if you enter a buy order at 11:00 a.m., the order won't be filled until the end of the day (typically 4 p.m. Eastern Time). ETFs are priced throughout the day, therefore trading like stocks. If you enter a "market order," it will be filled immediately.

The other key difference is how ETFs are bought and sold. With a mutual fund, you can purchase fractional shares at any broker. If you want to buy $500 worth of XYZ mutual fund, you can (unless it has a higher minimum required investment amount). However, ETFs can only be purchased in whole shares at most brokers (Fidelity and Vanguard are notable exceptions).

To buy $500 of XYZ exchange-traded fund at a broker that sells only whole shares, you'd have to divide $500 by the price per share to see how many shares your money could buy.

Here are the key steps to buying an ETF.

  1. Go to your broker's website. Open the stock and ETF trading page rather than the usual mutual funds trading page.

  2. Get a price quote. Each broker's process differs, but a "Quote" or "Symbol" is likely available on the screen. Enter the ticker symbol. While writing this article, the ticker for the SPDR S&P 500 Index ETF (SPY) produced a quote showing that the last trade took place at $313.84 per share. That was also the current "Ask" price.

  3. Determine how many shares to buy. Let's say I have $4,000 to invest in this ETF, but my broker doesn't allow fractional purchases. I would divide $4,000 by the Ask price of $313.84. Doing so results in an answer of 12.75 shares, so I'd round down to 12 shares. I would enter that in the "number of shares" field. (Fortunately, you don't have to pay a commission when buying or selling ETFs online!)

  4. Choose the type of order. Choices are typically "Market" (the trade will be filled right away at the next available price), "Limit" (the trade will be made at a specified price or better within a defined time frame), or some variation of "Stop" (the trade will be made when the security's price surpasses a certain point). A market order is fine. There's no need to do anything fancy here. (When using a market order, leave the "Time in Force" as "Day.")

That's it!

Written by

Mark Biller

Mark Biller

Mark Biller is Sound Mind Investing's Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark also serves as Senior Portfolio Manager to SMI Advisory Service’s Private Client managed-account program and the SMI Funds.

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