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Vanguard: ETF Trading Best Practices


With the recent focus on ETF-trading behavior and the differences between an ETF’s market price and the net asset value of its underlying assets (see Jim Rowley’s blog on this topic), I have been receiving even more questions than usual about ETF trading mechanics.

As head of Vanguard’s ETF Capital Markets Team, I spend much of my time talking with advisors and other clients about the best ways to trade ETFs.

We all learned in elementary school a simple reminder about fire safety: Stop, drop, and roll. There’s a similar way to think about safety with ETF trading: Limit, block, and call.


When you trade ETFs, consider using limit orders, not market orders, as your default trade type. Whether the markets are calm or volatile, protecting your trade by using a limit order that defines your price is sensible and smart. While a market order ensures the trade’s execution, it doesn’t ensure the price at which it will execute. How comfortable are you with explaining to a client why the ETF trade was executed at either the high or low price of the day or way off from the value of its underlying assets? Limit orders may also limit those conversations.

There are two types of limit orders that we see used in an effective way:

  1. Consider a marketable limit order—a limit price either well above the offer when buying or well below the ask when selling. This essentially accomplishes the same goal as a market order, but with some price protection and mitigation of unexpected, large price deviations between ETFs and their underlying assets or the market overall.
  2. For clients who like to use stop orders as a way to enter or exit an ETF position, placing stop limit orders is advisable. A stop order essentially becomes a market order and does not offer you the same protection as a stop limit order for reasons that are analogous to the discussion above about market versus limit orders.


If your order is of sufficient size (usually 10,000–20,000 shares or more), you should consider sending the order to your broker’s block desk. In these cases, the order size might result in additional transaction costs, such as market-impact costs, or in depleting the depth of the ETF’s order book, resulting in poor execution outcomes. However, block desks can easily source liquidity for you in any ETF—regardless of how large the trade may be or how little ADV an ETF may have—to ensure execution at a fair market price and in short order.


Finally, if you have questions about ETF liquidity or trading or want further assistance in trading large ETF positions, my colleagues on the Vanguard ETF Capital Markets Team and I are ready and available to help.

Brandon Clark is a manager in Vanguard Equity Investment Group.