What’s an ETF?
An Exchange Traded Fund (ETF or Exchange Fund) is basically your equivalent to a mutual or unit investment fund. However, there is a nuance that makes all the difference: its units trade on a stock exchange, which means that its bonds or stocks are basically shares; one might even go as far as to say that an exchange traded fund is exactly what the name implies. ETF is a basket of securities, or assets, tracking an underlying index. It has a share price so it can be easily bought or sold on a stock exchange. Here, you have your:
- - stocks,
- - bonds,
- - commodities,
- - coins,
- - or even a mix of them.
Or basically, all things trading, i.e., anything you can buy or sell on a stock exchange.
What’s the point of ETFs?
It’s been a long time coming: rising popularity of trading added fuel to the fire that’s been raging for quite a while now. Developing markets and rising cash flows made casual investing extremely unlikely and overly expensive. You can no longer build a diversified portfolio for fun; it will inevitably cost a small fortune to put together and keep. ETFs made it possible for any investor to build, broaden and diversify their portfolio as they invest into ETFs, regardless of their income. You don’t have to be George Soros or come from the Rockefeller family to trade there. That’s what makes it so appealing to millions of investors across the globe. ETFs open the door to less expensive trading as they are pooled assets, or a basket of securities; it, of course, would be costlier to buy all the stocks held in an ETF portfolio individually, so it’s a godsend to individual investors. Since ETFs became a thing over thirty years ago, it has been doing a great job in attracting new clients to the stock market as they provide exposure to a variety of bonds, stocks, assets, coins, and often at a minimal expense, so the stock market has since experienced an upturn with new clients rushing to invest their profit-seeking, albeit small, deposits.
Types of ETFs
Large financial companies build their funds using different approaches. Look up BlackRock or Vanguard Group, and you’ll know what we’re talking about. ETFs can be geographically based (stocks of companies in one country or group of countries), or they can be thematic (like sustainable stocks; they focus on a broad theme as a whole). There are also index ETFs, the most popular category of ETFs, where you track a benchmark index, such as Nasdaq. Additionally, you have your bond ETFs and commodity ETFs. They are pretty self-explanatory: you track bond price movements and commodities you can find on an exchange, respectively. And—you guessed it—there are crypto ETFs where you can track coins. There are tons of ETFs to choose from: in early 2022, there were 8, 552 funds, with over $10 trillion in assets.
Why Trade CFDs on ETFs?
Investors found that trading CFDs on ETFs is a great way to develop more flexible investment strategies and manage portfolios more effectively due to their versatility. This is also a lifeline since you get to enjoy all the benefits of ETFs; and yes, that includes receiving dividend adjustments.
With CFDs, an investor can profit on margin or invest with leverage.
Just remember: CFDs mean you get your profit at once as they have no settlement times, allowing traders to realise any profits instantly. ETFs, on the other hand, take more time to yield any return, so you cannot reinvest your funds unless you wait one or two days. So tread lightly.
Pricing
ETF share prices are always on the move as the ETF is bought and sold; it’s the basic rule of any asset on an exchange, so no surprises here. Underlying assets, or rather, changes in their price are the driver behind ETF share price fluctuations. If the ETF has an asset, like an index, then the price will most likely follow the index. Any other scenario should get you thinking. For example, if there is a great deviation from the index price, then an investor might want to think about where the money is going and whether it makes sense, economically wise, to keep investing in this ETF. Maybe the best course of action here would be to change lanes altogether.
An ETF share price might also go up or down as there are new shares or as they are redeemed. The redemption causes ETF shares supply to decrease, which consequently moves the price up.
But still, we can’t stress this enough: it would be costlier to buy all the assets held in an ETF portfolio individually, so buying an ETF share is a better option for investors who prefer keeping their money. If you count the money that goes into building a diversified investment portfolio, you might start asking yourself whether there is a cheaper investment option available. An ETF is your answer here.
Risks
ETFs are considered low-risk investments since they diversify risk by tracking different companies in a single fund. It is easy to get caught up in many advantages of ETFs investment, but don’t get excited too much. ETFs, like any other trading instrument, are prone to risks, and they’ve got some unique ones pertaining only to exchange-traded funds. You can basically compare an exchange-traded fund to a stock index; the pricing is driven by the stocks it contains. The index is likely to maintain a positive momentum even if a stock price plummets. That’s just the way it is. As is the rule, most ETFs are required to publish their holdings daily, so talk about transparency! They disclose their full portfolios on public websites every single day of the year. So if you invested in an ETF, that means you’d get complete transparency; in other words, you know exactly what you’re buying. You get the full picture of the fund’s holdings on the official or any financial website. This makes for a better understanding of the share price fluctuation;
however, don’t forget that an investor has to follow the ETF’s strategy and can’t just do anything they want with the assets they purchased. That’s the price you’re going to have to pay for low-cost and low-risk investment and trading. For example, you can’t just sell or buy parts of your ETF share. You either get rid of it or keep it; there is no in-between. So think carefully if you are ready for this commitment.
