ETFs, or Exchange Traded Funds, are a type of investment fund that tracks underlying assets like indices, bonds, commodities and divides ownership of those assets into shares. ETFs are traded on an exchange, and their value shifts during the day, due to buying and selling actions done by the traders. As ETFs trade just the same way stocks do, they do not have their own net asset value (NAV), and they are calculated once at the close of every market day.
What is an ETF
An ETF is a collection of assets put together, to permit traders to trade in a few markets simultaneously. The baskets are usually combined together with a common characteristic such as energy instruments, agriculture instruments and others. If you wish to trade a stock, commodity and bonds all together you can simply trade in the ETF market.
Some ETFs track the performance of a specific nation’s equity market. Examples are the MSCI Brazil Index Fund, MSCI South Korea Index Fund and others. ETFs also make it possible to invest in certain industry sectors. Examples offered by AvaTrade are the Dow-Jones U.S. Real Estate Index Fund and the Energy Select Sector SPDR. It is important to know that all ETFs are traded as CFDs.
ETFs are traded as a basket of assets – stocks, commodities and more, put together per sector. If you speculate that the energy market, for instance, will go up, you can invest in a few trades simultaneously. A prominent advantage of ETFs is that often they balance each other out; if one instrument’s value goes down, another instrument’s value can go up and even it out. If the price of crude oil goes down, as part of the energy basket, a stock of the same basket might even it out.
Commodity ETFs have grown in popularity over the last several years with retail investors and even institutions. This is because of the simplicity and liquidity that can be found in these markets. Remember, not all institutions will have the expertise to get involved in the futures markets, so if they choose to take advantage of a trend in a particular market, it is possible to do so with ETFs.
Let’s look at an example; if rising prices of energy are evident, what better way to enter the markets than to buy oil and natural gas, as well as have the infrastructure to do so? Also, what is easier? Buying each asset individually, or buying a single ETF? This can easily be done via the XLE, which is the Energy Select Sector SPDR ETF we offer here at AvaTrade. It is clearly evident that ETFs have changed the way traders now trade the markets.
Some ETFs are inverse, meaning that they are negatively correlated with the underlying asset, such as the SPDN, which is the Daily S&P 500 Bear 1X Shares ETF. This asset is often bought and viewed as a way to short the S&P 500. You can also gain access to leveraged ETFs, providing investors with more capital for trading the markets.
At this point, the comparison of ETFs vs mutual funds should be explored. Both are similar in that they both represent professionally managed baskets of individual stocks or bonds. An ETF, however, is traded directly on an exchange and can be jumped in and out of quickly. This is facilitated by many of the world’s financial markets that people know and trust.
The mutual fund is different because you buy into them through a broker and not an exchange. Beyond that, the mutual fund typically has a higher minimum initial purchase associated with it, and the holdings are opaquer, as they are normally actively managed. Here, you are trusting the money manager to have the experience and knowledge to know what to do, and you don’t have your own say in the investments.
When looking at ETFs vs Index Funds, by far the most important differences are the costs and the taxation differences between the two. At the end of the day, the ETF is typically what traders choose, but if you are looking to invest in one position for the long-term, the index fund can be a viable option. These index funds have been around for years, and they do exactly what you think they would do – offer ownership of stocks that make up an entire index, such as the S&P 500.
How to Trade ETFs with AvaTrade
Since ETFs play on the range of markets, you’ll need a broker that offers trading in all those markets with good conditions. ETFs require knowing the markets well enough to determine when to enter it and when to exit, and to know how each instrument will affect the other. AvaTrade is aware of the ETFs’ special nature and helps you stay on top of the market, to use the price changes to your favour.
AvaTrade offers a range of popular ETFs to trade as CFDs, giving traders the ability to trade long or short with leverage of up to 20:1.
When you wish to start trading, you can choose from a vast selection of trading platforms. Some of them are built for manual trading, whilst others are for traders who prefer their trades to be done automatically. We also support the use of expert advisors for MT4, as well as Autochartist and Guardian Angel add-ons. Thanks to that variety each of our clients can find the platform that is most convenient for him to trade on. Opening a demo account before trading is a recommended option, so you can practice trading on those platforms before doing so in the real market. Platforms available at AvaTrade – and fully compatible with Android or iPhone:
- MetaTrader 4
- MetaTrader 5
- Automated Trading Platforms including Zulutrade and Duplitrade
One of the most common tools used by traders is Leverage (a.k.a. Margin trading), whose purpose is to enable the trader to open positions larger than his account’s equity. AvaTrade offers you up to 20:1 leverage when trading ETFs, which is the equivalent ot using only a fraction of a position’s value required in order to open it. Leverage is a common tool used worldwide, and we offer the best conditions for it
Using Leverage makes trading easier and can increase a trader’s profits. However, one should always bear in mind that losses can be magnified on the same scale.
How Much Will it Cost to Trade ETFs
You can read more about the benefits for our clients on the Trading Conditions & Charges page.
Educational tools available at AvaTrade
When trading any instrument, especially one as complex as ETFs, you need to keep yourself updated and informed at all time. Naturally AvaTrade caters clients with education and product knowledge, and we recommend using our video tutorials and other educational tools. Let us guide you all the way, and get exposed to learning materials and market reviews that are essential for learning how to trade.
Our portfolio of educational tools is vast. In addition, an education portal developed and maintained by AvaTrade called Sharp Trader offers any level of trader the right tools to get started on a potential trading career.
Start Trading ETFs with AvaTrade
If you enjoy working on several markets simultaneously, challenging yourself into making rational investments and trading on one of the most prestigious markets in the world – trading Exchange Traded Funds is exactly for you!