What are ETFs and why trade them as CFDs?

An exchange-traded fund, or ETF, is a basket of securities (forming a fund) that trade like shares on major stock exchanges. The securities that make up an ETF can be varied. These may include stocks, bonds, commodities, or currencies.

An ETF may track the performance of a broad index, like the S&P 500, or it may track a specific country’s index or sector. They comprise some of the most liquid asset classes traded on the NYSE and are popular with institutional and retail traders.

Here are some of the most common types of ETFs available:

Equity ETFs

Bond/Fixed Income ETFs

Commodity ETFs

Currency ETFs

Speciality ETFs

Factor ETFs

Sustainable ETFs

Which ETF to invest in all depends on you; the level of risk you are prepared to take and the returns you want. As with any investment, you need to understand the risk-return ratio of every ETF, which is available in the fund offering documents which might help you decide which ETF can cater to your investment needs.

It’s important to know whether an ETF is actively or passively managed. Most are passively managed which means the fund manager is simply to ensure that the ETF tracks the specified index or asset. With an actively managed fund, they will aim to outperform a specified benchmark. ETFs generally have lower management fees that actively managed funds.

Dependant on your trading approach, they can be traded long term or short term and as CFDs as a way of accessing the opportunities as leverage.

Why trade ETF CFDS:

ETF CFDs enable you to trade with leverage, which means you only need a percentage of the notional value to open a position, reducing capital requirements. As such, you can increase the potential profit or loss from a trade. You can trade ETFs long or short, which means you can potentially profit from any price direction. It can also be very cost effective for active traders with low commission per trade.

Benefits:

• Trade long or short
• Trade on leverage
• Cost effective with low commission
• Automated trading strategies

Other things to consider:

• Leveraged product which can amplify wins and losses
• No ownership of underlying asset
• Spread can widen during market volatility
• Overnight holding costs

There are advantages and other things to consider when trading ETF CFDs and it’s important for traders to take these into consideration before making an investment decision.

If you are interested there are 25 ETF CFDs available to trade on a GO Markets MT5 CFD account.