ETF

Exchange traded funds (ETFs) have been around since the late 1980’s and quickly gained popularity as investors started looking for alternatives to mutual funds. Investors, both institutional and individual, could see the benefit of holding a specific group of stocks with lower management fees and higher intraday price visibility.

BENEFITS OF TRADING ETFS

The easiest way to highlight the advantage of trading like a stock is to compare it to the trading of a mutual fund. Mutual funds are priced once per day, at the close of business. Everyone purchasing the fund that day gets the same price, regardless of the time of day their purchase was made.

But similar to traditional stocks and bonds, ETFs can be traded intraday, which provides an opportunity for speculative investors to bet on the direction of shorter-term market movements through the trading of a single security. For example, if the S&P 500 is experiencing a steep rise in price through the day, investors can try to take advantage of this spike by purchasing an ETF that mirrors the index (such as a SPDR), hold it for a few hours while the price continues to increase and then sell it at a profit before the close of business. Investors in a mutual fund that mirrors the S&P 500 do not have this capability—by nature of the way it is traded, a mutual fund does not allow speculative investors to take advantage of the daily fluctuations of its basket of securities.

LONG VS SHORT

With both long and short trades, profits and losses will be realised once the position is closed.

You don’t have to use a CFD to mimic a standard trade – you can also open a CFD position that will increase in value as the underlying market decreases in price. This is referred to as selling or going short, as opposed to buying or going long.

If you think Apple shares are going to fall in price, for example, you could sell a share CFD in the company. You’ll still exchange the difference in price between when your position is opened and when it is closed, but will earn a profit if the shares drop in price and a loss if they increase in price.

ETFs are usually designed to track the performance of an index, like the FTSE 100, but they can also track sectors such as energy, agriculture or healthcare, or individual markets like gold, oil or the US dollar. An ETF will hold assets that enable it to track its benchmark market as accurately as possible – for example, a FTSE-tracking ETF might hold shares in all of the FTSE 100’s constituent companies.

HOW ETFS WORK

Like stocks, ETFs are divided into shares that you can buy or sell on an exchange. This means you can gain exposure to the performance of an entire index or sector, with a single trade. For instance, instead of buying shares in many individual energy companies, you could buy shares in one ETF tracking the energy sector. From a solitary transaction, you’d gain broad exposure to the industry’s combined performance, and subsequently have only one open position to monitor and manage.

TRADING FLEXIBILITY

ETFs are bought and sold during the day when the markets are open. The pricing of ETF shares is continuous during normal exchange hours. Share prices vary throughout the day, based mainly on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling.

The nearly instantaneous trading of ETF shares makes intraday management of a portfolio a snap. It is easy to move money between specific asset classes, such as stocks, bonds, or commodities. Investors can efficiently get their allocation into the investments they want in an hour and then change their allocation in the next hour. That is not something I recommend, but it can be done.

ETFs

  • Trades Like a Stock
  • ETFs can be purchased on margin and sold short.
  • They trade at a price that is updated throughout the day.
  • Allows you to manage risk just like a stock.
  • You can quickly look the daily change.
  • Capital gains tax exposure is limited
  • Lower discount or premium in price
  • Dividends are reinvested immediately

ETFS VS CFDS

CFDs

  • Direct market access (DMA) on forex and shares
  • Trade at the market price on shares
  • Losses can be offset against profits for tax purposes
  • Deal on rising and falling markets
  • Leveraged access to the markets
  • No stamp duty
  • 24-hour dealing
  • Use prices based on the underlying market
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DISCLAIMER: Our website offers information about investing and trading, but not personal advice. Please remember past performance is not a guide to future returns and that investments can go up and down in value, so you could get back less than you put in.
RISK DISCLAIMER: Trading is highly speculative, carries a level of risk and may not be suitable for all investors. You may lose some or all of your invested capital; therefore, you should not speculate with capital that you cannot afford to lose. You may need to seek 3rd party financial advice before engaging in trading.