Most investors are settled into an investment routine using ETFs.
However, if you have a portion of your portfolio in both, mutual funds and ETFs, and plan on making some adjustments, you need to be aware of the different settlement dates for your trades.
Reader Denny was asking for clarification on this issue:
Regarding brokerages / buying and selling holding periods / just how does this all work? If you sell, there is a 3-day settlement time period. Does that mean that money is unavailable until it is settled back into sweep account? If you buy, can you sell that ETF later in the same day? Is your buying and selling limited to money that is considered settled?
The first thing you need to be aware of is that Mutual funds and ETFs have different settlement dates. For Mutual Funds, it’s T+1 (Trade date + 1 day) and for ETFs, it’s T+3.
That means if you want to withdraw your money, you need to wait until the settlement date has passed. However, if you just want to re-invest, different rules apply.
Let’s look at four different scenarios of dos and don’ts:
1. You can sell an ETF right now, get your order filled and place another order to buy another ETF on the same day. Why? Because the settlement dates are the same (T+3).
2. You can do the same with mutual funds: Sell one today and buy another one today (T+1).
3. You can also sell a mutual today and buy an ETF today. The mutual fund trade will settle first (T+1) before the ETF trade settles (T+3).
4. You can’t sell an ETF today and use the proceeds to buy a mutual fund today. Why? Because the proceeds from the ETF won’t be available until the settlement date, which is T+3, while the mutual fund trade settles in T+1.
What you can do is, wait 2 days and then place your mutual fund order so it settles on the same day as your ETF trade.
As they say in golf, if you want to play this game, you have to know the rules.
Comments 7
Ull,
My Scottrade situation is this, if I sell an ETF today in an IRA or non margin account and buy another ETF today I can't sell it until the money from the first one sold is settled.
How do the frequent trading rules work? How often do you have to buy/sell the same ETFs before you are pinned as a day trader? I don't mean this as a constant ongoing pattern week after week but during market reversals when I may have just bought some ETFs only to have them hit my stop loss quickly and end up buying and selling within a few days.
Anon,
ETFs don't have frequent trading rules, only some mutual fund companies do. You can trade ETFs as much as you want.
Ulli…
Ulli,
I agree with the message Mr. Trendman wrote earlier at Scottrade if one is trading in a non margin account and sells an ETF and buys another the same day he can't sell that one till the first one settles or he has created what Scottrade calls a free ride. After a few of those they may restrict one from internet trading for a while. If one is trading in a margin account then one can trade as much as one wants with no problem with ETFs or stocks.
Re Anonymous' question about how often do you have to trade before you are labeled a day trader, I believe it is trading the same financial instrument, i.e. stock, ETF, option, mutual fund, etc. 4 times within 5 days. Then, I believe it's the brokerage firm's call, as to what happens next. Some brokerages, I believe, require you to have a margin of a certain size, in your account, for so many days, like 90. If the brokerage account is an IRA, I believe there is no margin requirement. I suggest you check with your broker, on this, if you are thinking about trading this way, though.
Ulli,
There is lots of speculation as to how often we can trade ETFs, well in a non margin account such as an IRA one may not be able to trade as much as one wants. I suggest that anyone interested to find the true annswer simply call their broker and ask this question. Hey broker I am trading in an IRA account can I trade ETFs anytime I want say 3 times per day or every day or do I after selling one and buying another have to wait till the one just sold settles before I sell the second one bought or might that be called a "Free Ride". If broker has a vague answer ask the broker what is a Free Ride?
Thanks
My experience today thru Scottrade was this. I sold an ETF in my IRA account and a few minutes later bought a different ETF using less money than I would get from the one I had just sold, but prior to it letting me make the online trade I had to agree to a statement. The statement said I was using unsettled funds and that if I buy the new ETF that I could not sell it until the one just sold settles. They call that a "Free Ride" an can ban one from online trading if it happens too many times. In a margin account there is no problem trading as much as I would like.
Larry