DECEMBER 14, 2022

As ETFs Boom, Trading Strategies Matter in a Volatile Market

3 Minute Read

Capital markets haven’t been an easy road for investors to navigate in 2022, due to a bear market, red-hot inflation and rising correlations that have hampered diversification. Traditional safe havens for long-term investors have struggled too, with cash and Treasuries facing a rising-rate environment alongside historically high levels of market volatility.

This uncertainty is one of the reasons behind what could be a record-breaking year in trading volume for exchange-traded funds (ETFs) due to their ability to provide investors with access to a wide variety of market sectors, attractive liquidity and low fees. In addition, many investors are using this vehicle for its tax-loss-harvesting properties as 2022 draws to a bumpy close. All of these benefits have led to a flurry of activity within ETF trading, with one sector in particular— actively managed ETFs—seeing a notable surge in popularity.

The ability to tap into an actively managed strategy within the transparent ETF wrapper has helped drive the popularity of actively managed ETFs—and their substantial asset growth in 2022. Despite comprising only 5% of total ETF assets, active ETFs now represent 12%, or $59 billion, of the industry’s net inflows.1

But as this security type continues to grow, there are nuances with trading ETFs that investors should consider before deciding to buy or sell. Like common stocks, ETFs trade in shares on exchanges, and these similar features can affect trading aspects like liquidity, transaction costs and bid/ask spreads. For both active and passively managed ETFs, issuers commonly suggest that investors learn the distinctions between the different types of trades one can place, especially when ETF volatility is high.

Market Orders: Emphasizing Timing over Price

The simplest way brokerages allow investors to place trades is through a market order, which is an order to buy or sell a security at that given moment in time. This type of order is based on timing rather than price, and the requested order from the investor will be filled as quickly as possible. Prioritizing speed provides advantages for certain investors, but the exact price of this type of order is often unknown until after the order is filled, and could be quite different from the value of the ETF at the time the order is placed. During volatile periods, price swings tend to be greater and market orders provide no price protection.

Limit Orders: Focusing on Price over Timing

limit order for an ETF trade prioritizes a specific price target over speed of execution, which can make a difference when ETF trading becomes more volatile, spreads widen and prices fluctuate. A limit order gives traders certainty that their order will be executed at the price they request (or better), but there is risk. Brokerages rank all limit orders by price competitiveness, so an order may be only partially executed—or not at all—on a given day.

While the knowledge that they can buy an ETF at a certain price is reassuring to many investors, and choosing a limit order over a market order can make the trading process more reliable and efficient, it may take more time and hand-holding than a market order, which will be executed immediately but may result in an undesirable price. Given that macro developments and unexpected news may continue moving markets this year, prudent trading techniques remain an important facet of ETF trading.

Risk Market Orders: Targeting the Best of Both Worlds

One of the best ways to combine price transparency with timeliness of execution on a trade is to work with the trading desk at your custodian, TAMP (turnkey asset management program) or related platform through which you access the market. These platforms have trading desk relationships with the biggest ETF market makers, and can call them to request bespoke bids or offers on specific trade sizes, with an immediate execution. This type of ETF trade is called a risk market order, and is often highly recommended for moderate to large orders. As it combines price protection with immediate execution, it is one of the most efficient ways to buy or sell a security. To place a risk market order, be sure to work with a custodial trading desk through a financial advisor, who may help facilitate a more efficient ETF share price execution experience.

AB ETFs: On Active Duty

AllianceBernstein now offers two new active ETFs—the AB Ultra Short Income ETF and the AB Tax-Aware Short Duration Municipal ETF. These ETFs give investors new options to help diversify their assets when volatility fluctuates. As the firm’s ETF lineup continues to grow in these unsettled markets, sound trading practices are critical to ensuring the best ETF buying experience. New ETFs may experience unexpected price swings when larger orders are placed. Knowing what type of order to place can provide security of execution and better overall performance for the ETF investor.

For more information on AB’s ETFs, please visit, “Adoption of Active ETFs Is Accelerating,” November 7, 2022.
Not to be treated as tax advice. Please speak with a professional tax advisor.
Investing in ETFs involves risks, including loss of principal.
Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

TAFI—Bond Risk: The Fund is subject to the same risks as the underlying bonds in the portfolio, such as credit, prepayment, call and interest-rate risk. As interest rates rise, the value of bond prices will decline. Below-Investment-Grade Securities Risk: Investments in fixed-income securities with lower ratings (aka “junk bonds”) are subject to a higher probability that an issuer will default or fail to meet its payment obligations. These securities may be subject to greater price volatility due to such factors as specific municipal or corporate developments and negative performance of the junk bond market generally, and may be more difficult to trade than other types of securities. Municipal Market Risk: Economic conditions, political or legislative changes, public health crises, uncertainties related to the tax status of municipal securities or the rights of investors in these securities may negatively impact the yield or value of a municipal security. Tax Risk: The US government and Congress may periodically consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the income shareholders receive from the Fund by increasing taxes on that income. Derivatives Risk: Derivatives may be more sensitive to changes in market conditions and may amplify risks. New Fund Risk: The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision.
YEAR—Investment Securities Risk: To the extent the Fund invests in other funds, shareholders will bear to layers of asset-based expenses, which could reduce returns. Market Risk: The market values of the portfolio’s holdings rise and fall from day to day, so investments may lose value. Interest-Rate Risk: As interest rates rise, bond prices fall and vice versa; long-term securities tend to rise and fall more than short-term securities. Credit Risk: A bond’s credit rating reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. If the issuer’s financial strength deteriorates, the issuer’s rating may be lowered, and the bond’s value may decline. Inflation Risk: Prices for goods and services tend to rise over time, which may erode the purchasing power of investments. Foreign (Non-US) Risk: Non-US securities may be more volatile because of political, regulatory, market and economic uncertainties associated with such securities. Fluctuations in currency exchange rates may negatively affect the value of the investment or reduce returns. These risks are magnified in emerging or developing markets. Derivatives Risk: Investing in derivative instruments such as options, futures, forwards or swaps can be riskier than traditional investments, and may be more volatile, especially in a down market. Below-Investment-Grade Securities Risk: Investments in fixed-income securities with lower ratings (commonly known as “junk bonds”) tend to have a higher probability that an issuer will default or fail to meet its payment obligations. Leverage Risk: Trying to enhance investment returns by borrowing money or using other leverage transactions such as reverser purchase agreements—magnifies both gains and losses, resulting in greater volatility. New Fund Risk: The Fund is a recently organized, giving prospective investors a limited track record on which to base their investment decision.
AllianceBernstein ETFs are distributed by Foreside Fund Services, LLC, in the US only.