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  • How To in a Taxable account

    Just curious how people buy ETFs in a taxable account.  Do you use the "Limit" function, the "market" function, "marketable limit" function or some other?  I'm just learning about these and am curious what others use.

     

    Also, do you just keep a little extra money as cash in the taxable account to allow for variation in the prices when you buy?  As I understand it, with ETFs, you can only buy whole shares in a taxable account, correct?

  • #2
    I usually buy very liquid ETFs, the ishare "core" series at Fidelity, no transaction cost, and the bid/ask spread is usually one cent. I generally place market orders.

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    • #3




      Just curious how people buy ETFs in a taxable account.  Do you use the “Limit” function, the “market” function, “marketable limit” function or some other?  I’m just learning about these and am curious what others use.

       

      Also, do you just keep a little extra money as cash in the taxable account to allow for variation in the prices when you buy?  As I understand it, with ETFs, you can only buy whole shares in a taxable account, correct?
      Click to expand...


      I use market orders. The bid-ask spread is so low on the major ETFs that it doesn't matter. If you want, you can buy in the middle of the market day (trading hours are 9:30-4:00pm) when the markets are generally less volatile.

      Yes, you can only buy whole shares of ETFs (you can have partial shares of mutual funds), and you will inevitably have a few dollars of cash lying around in the account.

      -WSP

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      • #4
        Though I don't currently hold any ETF's, when I did I tended to treat them like stocks in terms of a buy/sell order.  Though it can be painful in terms of tracking/execution, here is the 'framework' I used.  FYI, this framework also insured I didn't trade alot because its a PITA FWIW, insuring some discipline instead of day trading ETF .

        a. Never do 'market order' trades; with highly liquid ETF the bid-ask is fractions of a penny but no reason to give that up.

        b. I would use Limit Orders, Day only, and All or None.  A Limit Order insures you know the current price.  The Day and All or None help protect you from putting in an order and forgetting about it (until of course the worst possible time).  All or None protects you from your order getting split and potentially taking a small price change.  More of an issue if trading 'blocks' (10,000 shares), but I've had it happen once trading like 300 shares.

        c.  I generally stay away from trying to execute trades early or late in the day.  My non-peer reviewed reasoning is that there tends to be more volatility in the first and last half hour of a trading day.  Usually try to execute after the first hour of trading and before lunch.

        d. Pricing-  I tend to place the limit between 1 and 5 cents about the bid or ask.  For example if selling, I will put the limit a penny above the ask.  I don't want to be snapped up by the market maker on either side.

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        • #5
          "As I understand it, with ETFs, you can only buy whole shares in a taxable account, correct/"

          Not true.   I have large taxable accounts at Vanguard and Schwab. I make purchases and reinvest distributions in fractions at both shops.   I unusually purchase ( and sell ) with limit orders.  I don't know what "marketable limits" are; never heard of that.   Of course you will always have some cash in the till. The benefit of ETFs over mutual funds is the tax efficiency for long term investments.  ETFs pay out less capital gains quarterly or annually compared to mutual funds.  The taxable event occurs when _YOU_ sell, not when the manager reshuffles.

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          • #6


            PITA
            Click to expand...






            Though I don’t currently hold any ETF’s, when I did I tended to treat them like stocks in terms of a buy/sell order.  Though it can be painful in terms of tracking/execution, here is the ‘framework’ I used.  FYI, this framework also insured I didn’t trade alot because its a PITA FWIW, insuring some discipline instead of day trading ETF .

            a. Never do ‘market order’ trades; with highly liquid ETF the bid-ask is fractions of a penny but no reason to give that up.

            b. I would use Limit Orders, Day only, and All or None.  A Limit Order insures you know the current price.  The Day and All or None help protect you from putting in an order and forgetting about it (until of course the worst possible time).  All or None protects you from your order getting split and potentially taking a small price change.  More of an issue if trading ‘blocks’ (10,000 shares), but I’ve had it happen once trading like 300 shares.

            c.  I generally stay away from trying to execute trades early or late in the day.  My non-peer reviewed reasoning is that there tends to be more volatility in the first and last half hour of a trading day.  Usually try to execute after the first hour of trading and before lunch.

            d. Pricing-  I tend to place the limit between 1 and 5 cents about the bid or ask.  For example if selling, I will put the limit a penny above the ask.  I don’t want to be snapped up by the market maker on either side.
            Click to expand...


            I'll disagree with you on using limit orders, especially for a beginning investor. The ETFs we would be dealing with have bid-ask spreads that are a fraction of a penny, as you said. If he were buying 100 shares, that's less than a dollar on a >$10,000 order.

            If he puts a limit order a few pennies off the current market price, there's a chance that it might not be filled. He will need to periodically check that his trade was, indeed, filled. This is unnecessary time and effort wasted for less than a dollar. If the market runs away in the other direction, he may have to re-enter your order at a higher price to get the trade executed. With market orders, you're executed in (literally) less than a millisecond and you can move on with your day.

            -WSP

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            • #7
              'If he puts a limit order a few pennies off the current market price, there’s a chance that it might not be filled. He will need to periodically check that his trade was, indeed, filled. This is unnecessary time and effort wasted for less than a dollar.'

              @WSP-  Agree, it is not alot of money for the time and effort involved, which is exactly why I do it this way.  I never want to be 'comfortable' trading ETF's to a. insure you are making the trade for the right reason (i.e. modify/adjust your asset allocation) and b. if highly liquid ETF with tight bid-ask you are more than likely trading against the pros/computers in lower Manhattan which should scare you wondering what their motivation is versus yours.

              If you are doing a two to four ETF trades a year, a market order will suffice.  If you are trading ETF's once or twice a week, market orders are cumulatively a bad idea and my approach will be so painful you won't want to trade frequently.

               

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              • #8
                ETFs do not always track asset value. We had some crazy 1 day ETF price fluctuations a few years back. Even some big Vanguard ETFs. The limit order is to prevent buying or selling on some crazy up/downswing, not for the spread which is negligible on any large well traded fund.

                I set a limit order at the worse of bid/ask. You're not giving up the spread that way either.

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                • #9
                  Quote about Aug 24, 2015 flash etf crash from Barron's:

                  ETFs are supposed to—and generally do—trade in lockstep with the stocks they own, with very little tracking error. Yet when the S&P 500 fell as much as 5.3% in the opening minutes of trading, the $65 billion iShares Core S&P 500 ETF (ticker: IVV) fell as much as 26%, some 20 percentage points below its fair value. Disorderly trading affected big ETFs from every major provider: The $18 billion Vanguard Dividend Appreciation ETF (VIG) and the $12 billion SPDR S&P Dividend (SDY) plunged 38% apiece, while thePowerShares S&P 500 Low Volatility ETF (SPLV) fell as much as 46% before clawing back an hour after markets opened.

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                  • #10
                    I keep it simple and buy mutual funds.

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                    • #11
                      I usually Market order if middle of the day and make sure no volitility ongoing that day for ETFs.   Never after hours or at beginning/end of day/week where volatility is highest.

                      PoF - yes, if it's set and forget --  but if worthy for Tax Harvesting opportunities -- ETFs better -- especially now when we all are just waiting for that correction.

                       

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                      • #12


                        PoF – yes, if it’s set and forget — but if worthy for Tax Harvesting opportunities — ETFs better — especially now when we all are just waiting for that correction.
                        Click to expand...


                        I managed to TLH $46,000 in paper losses in 2016 with mutual funds, a year in which the market gained about 10%.

                        I can see where with ETFs, you might be able to catch a mid-day trough, whereas with mutual funds, you're guaranteed the end of the trading day price. Are there other advantages to ETFs in terms of TLH?

                         

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                        • #13
                          I generally do limit orders, but certainly don't have a good reason to in the ETFs I buy which are mostly just VTI (Vanguard total Stock) and VSS (Vanguard small international.) I do ETFs in my taxable and partnership 401(k), but funds everywhere else. It's just a cost thing in the 401(k). I don't really have a great reason to be using the ETFs in the taxable account.
                          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                          • #14
                            I used to do market orders.  I now do limit orders.  I might change back one day, but with a limit order, you know your price.  With a market order, invariably the price ends up being some inexplicable fractionally higher amount than the market price.  If you're buying a few shares of something that trades in high volumes, this is probably no big deal, but if you're buying a lot of something that doesn't really move much, the difference could be hundreds or thousands of dollars.

                            Also, if you're buying with a finite amount of money, a few cents or a dollar more per share might mean you can only buy 123 shares instead of the 124 you budgeted for, and your trade may never occur on that basis as well.

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                            • #15
                              There are a few reasons I prefer ETFs over mutual funds, but the main one is portability.  I make a few thousand dollars a year moving my taxable account and Roth IRA around for brokerage bonuses.

                              I don't think limit orders are worth the trouble if it saves you less than $1.
                              I sometimes have trouble reading private messages on the forum. I can also be contacted at [email protected]

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