Clarifying Basic Trading Issues

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.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.