When is the best time of day to buy an ETF?

Conventional wisdom says an investor should buy shares when trading volume is highest, at the market’s open and toward the close. The idea is that heavier trading generally means narrower bid-ask spreads—the difference between the bid price of a share (what you can sell it for) and the higher ask price (what you can buy it for). A wider spread at the time of purchase means less profit when the shares are eventually sold.

My research suggests the conventional advice on timing is only half right—buying near the close is smart. But for all asset classes of exchange-traded funds that my research assistants and I investigated, an investor can save by avoiding placing trades right at the open and instead placing them later in the day.

The average saving is 1 basis point, or 0.01% of the share price, for each share bought and later sold. That’s 1% of the per-share price for every 100 shares—for instance, a $10 saving on 1,000 shares of an ETF at $100 a share. It might seem like a small amount, but it adds up the more trades you place.

To investigate this issue, my assistants (Luis Paz-Perez and Brandon Gilbert) and I collected trading data throughout the day for 40 of the most heavily traded ETFs on U.S. markets. We sorted these ETFs into several categories: large-cap U.S. equity, small-cap U.S. equity, Asian equity, European equity, international equity, commodities, and bonds/fixed income.

Each day over the course of the third quarter of this year, we recorded the bid and ask prices for each of the ETFs throughout the day. Prices were recorded at the market open (9:35 to 9:40), midmorning (11 a.m.), midday (12:30), midafternoon (2 p.m.) and the close (3:50 to 3:55).

We then calculated the average bid-ask spread for each ETF category at each point in the day. We discovered that for every ETF category we studied, the market open is the worst time for an investor to purchase shares.

For instance, the average bid-ask spread for large-cap U.S. equities was 0.022% of the share price at the market open. The average spread for the same ETFs at 12:30 was 0.013%, and by the close the average spread was 0.012%. This means an investor could save 0.01% of the share price for each share purchased by trading at the end of the day instead of at the market open.

We also found that the bid-ask spread was even worse in the morning on high-volatility days (when the well-known volatility index, the VIX, is over 25) and extreme down days. That means investors who avoid trading near the open will save even more on those days.

So, timing your ETF purchases isn’t as simple as trading when market volume is at its highest. The best advice is to avoid buying in the morning.