Can You Buy ETFs After Hours? What to Know
Explore how to trade ETFs beyond standard hours and understand the specific procedures and important considerations for extended market sessions.
An Exchange Traded Fund (ETF) is an investment fund that holds a collection of assets, such as stocks, bonds, or commodities, and trades on stock exchanges throughout the day, much like individual stocks. These funds offer diversification and can be bought and sold during standard market hours. While the primary trading window is during regular stock exchange operations, it is generally possible to buy and sell ETFs outside of these standard hours. This extended trading capability allows investors to react to news or make adjustments to their portfolios beyond the typical market schedule.
Understanding After-Hours Trading
After-hours trading refers to the buying and selling of securities, including ETFs, outside of the traditional trading hours of major stock exchanges. This extended period is typically divided into two segments: pre-market trading and post-market trading. Pre-market sessions usually begin around 4:00 AM Eastern Time and conclude just before the standard market open at 9:30 AM Eastern Time.
Following the close of the regular trading session at 4:00 PM Eastern Time, post-market trading commences, frequently extending until 8:00 PM Eastern Time. During these extended hours, trades do not occur directly on the main stock exchanges. Instead, Electronic Communication Networks (ECNs) facilitate transactions. ECNs are automated systems that match buy and sell orders directly between market participants. These ECNs operate continuously, allowing investors to submit orders and potentially execute trades when primary exchanges are closed.
These alternative trading systems provide a venue for investors to react to news or corporate announcements that occur outside of regular market hours. The operational environment of ECNs differs significantly from the liquidity and pricing mechanisms present during standard trading hours. This distinction is important for understanding the unique characteristics and potential challenges associated with after-hours trading.
How After-Hours ETF Trading Works
Engaging in after-hours ETF trading primarily depends on the services offered by an individual’s brokerage firm. Most modern brokerage platforms provide access to extended trading sessions. Access often requires enabling extended hours trading within the account settings. Once enabled, the process of placing an order is similar to regular hours, but with distinctions.
After-hours ETF trading requires the exclusive use of “limit orders” instead of “market orders.” A limit order specifies the maximum price an investor is willing to pay when buying or the minimum price they are willing to accept when selling. Market orders, which instruct the broker to execute a trade immediately at the best available price, are unsuitable during extended hours due to wide price swings and thin liquidity. Using a limit order helps protect investors from unexpected price execution, a common risk in less liquid trading environments.
When placing an after-hours limit order, the investor navigates their brokerage platform to select the desired ETF. They then input the number of shares and specify their limit price. There will typically be an option to designate the order for “extended hours” or “after-hours” trading. Without selecting this option, the order would simply remain pending until the next regular market session. The order duration, such as “Good-Til-Canceled (GTC)” or “Day Order,” may also need adjustment for after-hours execution.
Key Considerations for After-Hours ETF Trading
A characteristic of after-hours ETF trading is lower liquidity compared to regular market hours. With fewer market participants actively placing buy and sell orders, finding a counterparty for a trade at a desired price can be more challenging. This reduced liquidity means larger orders might take longer to fill or could impact the ETF’s price, as there are fewer outstanding orders to absorb the volume. Investors may find their orders are partially filled or not filled at all.
Thinner liquidity contributes to higher volatility in ETF prices during extended sessions. Even relatively small buy or sell orders can cause noticeable price swings because there are fewer bids and asks to absorb the trading pressure. The price of an ETF can move more dramatically and unpredictably than during the regular trading day, increasing risks for investors. Such rapid price movements can lead to unexpected execution prices if not managed carefully with limit orders.
Another consequence of reduced liquidity is the widening of bid-ask spreads. The bid price is the highest price a buyer will pay, and the ask price is the lowest price a seller will accept; the difference is the spread. During after-hours, this spread expands, meaning investors buying an ETF pay a higher price relative to the current market value, and sellers receive a lower price. This wider spread increases the cost of executing a trade, reducing potential profits or increasing potential losses.
News releases that occur outside of regular market hours, such as corporate earnings reports or economic data, can have an immediate impact on ETF prices during after-hours trading. Investors reacting to this news may cause rapid price adjustments before the main market opens, potentially creating a gap between the after-hours closing price and the next day’s opening price. Even with the use of limit orders, there is no guarantee of execution, as the price might move away quickly from the specified limit if market conditions shift rapidly.