Things to consider when trading Invesco QQQ

Exchange-traded funds (ETFs) have become a cornerstone of modern investing, offering exposure to various markets with the ease of trading stocks. When selecting an ETF, factors like fees, investment strategy, and historical performance are all things that investors pay close attention to. However, understanding the mechanics of ETF trading is also important to help investors secure the best prices on ETF transactions and minimize overall costs.

Unlike mutual funds, ETFs trade throughout the day on an exchange, meaning liquidity, trade execution, and transaction costs all play a role in shaping an investor’s experience. While long-term investors may not actively trade ETFs frequently, ensuring that every transaction is executed efficiently can help avoid unnecessary costs.

Here are five key considerations to keep in mind when buying and selling ETFs:

1. Understanding an ETF’s liquidity

An ETF’s liquidity determines how easily investors can buy or sell shares without significantly impacting the price. One of the most common ways to measure liquidity is by looking at the bid/ask spread—the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Narrower spreads generally indicate higher liquidity and lower trading costs.

Liquidity is influenced by two main factors:

• ETF trading volume: ETFs with high average daily trading volume tend to have narrower bid/ask spreads, making them more cost-efficient for investors
• Liquidity of the underlying assets: Even if an ETF itself has low trading volume, it may still be highly liquid if the securities it holds are widely traded

Invesco QQQ—which tracks the Nasdaq-100 Index—is one of the most liquid ETFs available. As of December 31, 2024, QQQ was the second-most traded ETF in the U.S. based on average daily volume.¹ The Nasdaq-100 Index is also considered highly liquid, as it consists of some of the largest and most well-known companies globally. Additionally, financial products based on the Nasdaq-100 collectively trade over $620 billion in value each day.²

2. Market vs. limit orders: Controlling your execution price

When buying or selling ETFs, investors can choose between market orders and limit orders:

• Market orders: These execute immediately at the best available price, which can be useful in highly liquid ETFs. However, in volatile markets or for less-liquid ETFs, market orders may result in trades executing at less favorable prices.
• Limit orders: These allow investors to set a specific price at which they’re willing to buy or sell, offering greater control over their order. This is particularly important in fast-moving markets, as it helps prevent unexpected price swings from affecting trade costs. On the other hand, there is no guarantee that the ETF’s market price will hit the specified limit. In that case, the order will not be executed.

For investors trading during volatile sessions—such as on market-moving news or index rebalancing days—using limit orders can be a key tool for optimizing execution price.

3. Potentially avoiding the market open and close

While ETFs trade throughout the day, historically, bid/ask spreads have been wider within the first and last 30 minutes of the trading session. Early in the day, liquidity providers are often still adjusting their prices to new information, and at the close, large institutional investors often execute high-volume trades, creating short-term price swings.

To improve execution, investors may want to consider avoiding trading near the opening and closing bells.

4. Researching brokers with commission-free ETF trading

An ETF’s expense ratio is just one component of its total cost. Investors should also consider brokerage fees, trading commissions, and tax implications, as these can have a direct impact on returns.

In the past, trading commissions could eat into profits, especially for frequent traders. However, many major online brokerages now offer commission-free ETF trading, eliminating a key cost for investors. It’s always a good idea to confirm a broker’s commission policy before placing trades, as fees can vary across platforms.

Trading ETFs smarter

ETFs can offer flexibility, transparency, and cost-efficiency, but optimizing trade execution is essential to maximizing their benefits. Understanding these trading principles can help investors make informed decisions and reduce unnecessary trading costs over time.