An SMI member wrote to us a couple of weeks ago about ETF pricing that seemed abnormal, and our executive editor Mark Biller responded.
We suspect this topic is of interest to the broad SMI member audience, so here is the question and Mark's answer:
Dear SMI,
I was looking at investing in SMI 3Fourteen Full-Cycle Trend (FCTE). But when I checked on the Schwab site, I noticed a wide difference (more than $12 per share!) between the bid price and the ask price.
It seems I would have to signficantly overpay to buy this ETF, almost guaranteeing a loss when I eventually sell. That makes no sense. Am I missing something?
Mark: Thanks for writing with your question. It's an important one!
Before answering, I'll mention that the upside of the explosion in ETF popularity over the last decade is that ETFs offer many compelling benefits. However, a downside is that they act differently than traditional mutual funds in key respects, one of them being that they trade like stocks. This introduces greater complexity in how ETFs are bought/sold relative to how buying/selling is done with traditional mutual funds.
Based on the time stamp on your message, it appears you were looking at an ETF quote outside of regular market hours. Once the market closes, it is common for the "spread" — i.e., the range between the bid and ask prices of a security — to widen dramatically. That's a normal tendency, but right now it is exacerbated by the fact that markets are experiencing a lot of stress, which makes all the normal tendencies more dramatic.
The critical takeaway: SMI strongly recommends against entering "market" orders for ETFs when the market isn't open. As I write to you now (during regular market hours), the bid/ask spread on FCTE is more normal — only 5 cents. If you were trading an ETF when the market is open and saw a relatively narrow spread like that, you could expect the trade to be executed at a reasonable price.
I typically use "limit" orders when buying or selling ETFs. That ensures I get a price I'm comfortable with! Of course, the tradeoff for that certainty is that occasionally an order won't get filled at the price I want. When that happens, I have to re-enter the trade at a higher price (if I'm a buyer) or a lower price (if I'm a seller).
I hope that's helpful! Thanks for being an SMI member!
– Mark
