Traders buy CFDs (contracts for difference) to speculate on their prices within the day without purchasing the actual asset. ETFs (exchange-traded funds) are used for long-term investments to diversify one’s funds and generate passive income. What would happen if we combine the two?
Grand Capital now offers stock ETF CFDs for trading. The broker provides six instruments of this category: GLD, VOO, IWM, QQQ, VEA, SCHD, and USO. Learn more about them here.
Stock ETFs are a relatively young group of instruments. The first exchange-traded fund, Standard and Poor’s 500 Depository Receipt (SPDR) appeared in 1993, its portfolio followed S&P 500. The new instruments quickly gained popularity: according to the independent consulting agency ETFGI, total assets invested in ETFs globally reached $5.64 trillion in 2019. By that time, the industry had 7,850 funds from 420 providers. They are listed on 71 exchange in 58 countries.
Where do ETFs come from?
- A company creates a fund and buys assets. For example, securities of IT companies.
- The next phase: the fund’s shares are emitted and listed on an exchange.
- The fund’s shares are available for purchase.
- Profit or loss from the trade depends on the difference between the prices at which they are bought and sold.
What’s in a ETF portfolio?
An ETF portfolio is determined by its core asset. For example, FXIT includes the stocks of American tech companies, securities from over 90 issuers. There are also commodity ETFs, e.g. FXGD, its price is tethered to the price of gold. There are real estate ETFs, inverse ETFs (the price goes up as the underlying asset goes down), currency ETFs that are eligible for margin trading.
ETF vs stock trading: what’s the difference?
The main difference of buying an ETF from buying stocks: even one ETF share is already a diversified portfolio. An owner of a single company’s stocks is dependent on its success. If the chosen company goes down, the shareholder loses all invested funds.
The capital of ETF owners is more immune to risk. ETFs often include securities of a large number of companies (except for several commodity ETFs like the American oil fund USO). In case of any problems, a decline in the price of one asset is compensated by the growth of the rest.
Of course, instead of buying ETFs, it’s possible to purchase the stocks of all its components by yourself. However, this requires a significantly large investment. Moreover, in such case one would have to pay extra fees to brokers or exchanges for each instruments.
ETF or indices?
The composition of exchange-traded funds can be similar to indices: for instance, QQQ, Invesco QQQ Trust, Series 1 is analogous to NASDAQ-100. However, ETFs may combine very diverse assets that never go together in classic instruments. Or, they can have only one underlying asset: for example, GLD (the ETF of SPDR Gold Trust) is a trust with 100% gold-backed stocks, from the company’s own reserves.
Even with a smaller budget, an investor diversifies their investment by purchasing ETFs. They are managed more flexibly than indices. ETF managers can quickly dispose of losing assets and buy more promising ones. This means, that ETF quotes are less volatile and often show consistent growth. That’s why buying ETFs is a good choice for long-term investments, it’s a way to generate passive income.
Index portfolios are formed according to strict criteria determined by respective regulators. An issuer of ETF manages the instrument based on the expected demand. In theory, such instruments can include very different assets that don’t belong together aren’t in classic instruments.
You can’t buy a share in an index, since index is a speculative notion. You can buy all securities included in the chosen index in proportion to their value. This requires large investments. For example, buying one share of each Dow Jones component would require at least $4,200.
There are also index futures, but you’ll have to you use the built-in leverage with them. Moreover, futures aren’t suited for long-term investments.
That’s why it’s easier for investors to buy a share in an ETF that follows the desired index. It includes the securities of the index in the right proportion. If an investor has a share in the fund, they have a share in all its assets.
Who makes money trading ETFs?
By investing in a stock ETFs, a person automatically diversifies their investments between all companies included in the respective index. That’s why ETFs are popular among investors who want to “buy and forget”, i.e. to generate passive income. Before ETFs, passive investors had only bank deposits and joint-stock investment funds.
However, ETF CFDs aren’t suited for daily trading. Here’s why:
- ETF prices fluctuate throughout the day as ETFs are bough and sold. This is what sets it apart from joint-stock investment funds that are traded only once a day after the market is closed.
- An exchange-traded fund is a basket of securities that are traded on an exchange, like stocks. ETF trading is accompanied by low risk rates. Brokers charge smaller fees than for buying each stock separately.
How to get a balanced investment portfolio?
Trade ETFs on Standard, ECN Prime, or MT5 accounts. Increase your profit with the 40% bonus with every deposit.
- Make a deposit.
- Claim a 40% bonus with your deposit.
- Open a Standard, ECN Prime, or MT5 account.
- Select several ETFs.
- Buy the stocks of each chosen ETF.
Follow the prices and wait for the right moment to take profit. The profit generated by trading the bonus funds and be withdrawn immediately.