Twelve Things You Need to Know About ETFs

By Ben Steverman - 2012-02-27T22:16:37Z

Illustration by Dennis Pacheco

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How do you get a fair price?

Using a limit order that specifies the price you want to pay when you buy an ETF can help ensure you get a fair price. Generally the more frequently an ETF trades, the closer its price is to the value of its holdings (its "premium" or "discount"), and the narrower the gap between what buyers and sellers will pay for shares (the "bid-ask spread"). Trading can take a larger bite out of returns in ETFs that trade rarely or are harder to construct, such as niche or emerging-market funds. The international stock Rydex MSCI EAFE Equal Weight ETF (EWEF) trades about 1,200 shares per day, vs. 19 million for the iShares MSCI EAFE Index Fund (EFA).

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