What Are ETFs? ETFs, Explained
ETFs are a popular investment option which are an option for all different types of both investors and traders. Given they are considered a traditional investment tool, there is excellent variety and options to choose from.
This article will give you an overview of what are ETFs, their origins, the disadvantages and advantages of ETFs and our top ETF CFDs to invest in for 2021 and into the new year of 2022.
Table of Contents
What are ETFs?
An Exchange Traded Fund (ETF) is a group of securities that you can buy or sell via a brokerage company on a stock exchange.
These underlying securities tend to represent an economy or a sector, so it's a way for investors and traders to invest in economies or sectors they are interested in without having to pick individual stocks and at much lower costs than mutual funds.
While the above describes the most typical scenario of an ETF structure, it is possible that an ETF also tracks a single index, individual commodity or so on.
Some examples of ETFs are listed below, linking to the option to purchase the ETF CFD:
- iShares S&P 500 Growth ETF CFD, which includes shares from the S&P 500
- VanEck Vectors Gold Miners ETF CFD, comprised of gold mining companies
- iShares Silver Trust ETF CFD, which reflects the performance of silver's price
- iShares PHLX Semiconductor ETF CFD, which tracks US stocks in the semiconductor sector
There are many more types of ETFs to choose from, including bonds, currencies and new growing markets such as biotechnology, artificial intelligence, and as of very recently – The first official Bitcoin ETF, the ProShares Bitcoin Strategy ETF.
As mentioned above, ETFs give traders and investors the opportunity to speculate on or invest in a sector, rather than choosing individual assets.
For example, you may have recently heard a lot about the growth of AI (Artificial Intelligence). However, you may not know how to find the right company to invest in since it is still a very new area.
In this case, an investor could turn to the Global X Robotics & Artificial Intelligence ETF CFD, shown below:
Admirals #BOTZ ETF CFD contract specifications shown; period of one month, from November 2, 2021 to November 29, 2021. Accessed on November 30, 2021. Past results are not representative of future results.
This ETF in particular seeks to invest in companies that can benefit from advances in the development of robotics and artificial intelligence. Therefore, it can provide the investor with access to a growing market, without having to choose a company individually.
As part of our Trader's Spotlight, you may also view the below video as an Introduction to ETFs:
This sector/economy focused approach makes Exchange-Traded Funds one of the most sought-after financial products for small investors. ETFs offer a broad array of benefits and, if selected carefully, can be an excellent way of achieving investment goals.
The Origin of ETFs
As a product, ETFs were created in the US 1993 when Nathan Most and Steven Bloom developed Standard & Poor's Depositary Receipts (SPY).
Economist Harry Markowitz was one of those who laid the first bricks in the creation of the Exchange Traded Fund. His idea was to introduce a publicly traded fund that was related to the world's most popular index: the S&P 500. Known as SPDRs or Spiders, the fund became the largest ETF in the world, now having a value of more than 43.3 billion dollars.
On US stock exchanges alone, there are nearly 1,000 ETF products with around $1 trillion invested in total.
In 1996, iShares debuted in ETFs globally, selling ETFs on a wide range of European, Asian and American indices. Thus, iShares established themselves as having the largest variety of ETFs, with more than 300 options for traders and investors.
This caused a domino effect in terms of the emergence of new ETF instruments that could be traded and to which the common investor could have access.
The success of stock ETFs encouraged the industry to launch one related to gold, and in 2004, Gold SPDR (#GLDAR) was launched. In the image below you can see the performance of this instrument over a year.
Admirals #GLDAR ETF CFD contract specifications shown; period of one month, from November 2, 2021 to November 29, 2021. Accessed on November 30, 2021. Past results are not representative of future results.
At Admirals, we offer the option to invest in ETFs directly via your free Invest.MT5 account. You can also purchase ETF CFDs via your Trade.MT5 account, which may be more suitable for trading activity.
How Do ETFs Work?
Just like company shares, ETFs are listed on stock exchanges and can be bought and sold during trading hours. Also, like listed stocks, an ETF will have a ticker symbol and intraday prices.
Where they differ from company stocks is that the number of shares available in an ETF can change daily as a result of the continuous creation of new shares, and redemption of existing shares in the ETF.
The market price of an ETF is usually kept in line with its underlying securities on an ongoing basis, due to the ability of an ETF to issue and redeem shares in itself.
In summary, these are the characteristics of ETFs:
- They are traded like equities, which makes their prices visible in real time.
- They can be sold or purchased at any time during trading sessions.
- They are a single instrument that contains several trading instruments, including shares and fixed-income securities.
- They are not exclusively available to corporate investors or large participants in financial markets.
Generally, ETFs are outstanding investment choices. They can be bought and sold in real time and have lower management fees than ordinary funds. For these reasons, ETFs are also starting to replace mutual funds as the default investment vehicle.
What Are the Differences Between ETFs and Investment Funds?
If you've considered investing in investment or mutual funds, you might feel like ETFs and investment funds sound very similar. While the two instruments share some similarities, they also have some key differences:
- An investment fund includes the contributions of several savers who transfer the management of those contributions. ETFs, however, are bought or sold directly in the stock market as if they were shares.
- Investment funds can be actively or passively managed, while ETFs are passively managed and, typically, have much lower costs.
- Active investment funds try to outperform indexes while the ETFs seek to match the returns of the index they replicate.
What Are Leveraged ETFs?
A leveraged ETF is an Exchange Traded Fund that uses financial derivatives and debt to amplify the returns of an underlying index. In plain English, this means you can access a high-value ETF for a relatively low deposit.
It is notable to mention, ETF CFDs represent the leveraged Contract for Difference of the ETF security. When you are purchasing an ETF CFD, you do not own the actual ETF, but instead you are trading on a contract for the price difference.
This allows you to initiate both Buy and Sell contracts on the price, depending on the market conditions and your strategy. If purchasing a regular ETF, then in this case you own the security outright.
Think of it like buying a house - you pay a 10% or 20% deposit up front, and the bank allows you to borrow the rest of the money in order to purchase the property. Similarly, some brokers offer leveraged ETFs where a trader can deposit just 20% of the ETF's value in order to trade it.
If the ETF then rises or falls in price, you will experience the full change in price, even though your deposit was just a fraction of the ETF's value. This means that if the market moves in your favour, your percentage return on investment (relative to your initial deposit) is much higher than it would be if you'd purchased the full value outright.
However, if the market moves against you, your losses will be magnified to the same extent.
Learn more about leverage in trading and investing.
What Are the Advantages of ETFs?
As with any investing or trading option, there are both advantages and disadvantages. We summarize the advantages of ETFs below:
- Reinvested Dividends: When investing in open-ended ETFs, the dividends of the companies are reinvested automatically.
- Diversification: The most attractive advantage of ETFs is the diversity they bring. A trader or investor has exposure to multiple stocks, styles and segments.
- Movement of a Stock: Like stocks, ETFs can be acquired on margin, with both Buy and Sell options, and by trading futures.
- Less Fees: Compared to actively managed funds, like mutual funds, ETFs carry lower expense ratio fees.
What Are the Disadvantages of ETFs?
While they have many advantages in many fields, ETFs do have some drawbacks, including:
- Settlement delays: ETF sales may not settle for two days after a transaction, which means that a seller's funds may not be available for re-investment until the two days have passed.
- Illiquidity: Some thinly traded ETFs may have wide bid/ask spreads, meaning your transaction costs could be high, although the same can be said about small company stocks that are thinly traded.
- Price discrepancies: While ETF prices track their underlying asset class reasonably well, there can be discrepancies.
- Trading costs: If the investment value is small or less frequent, there could be lower-cost alternatives by investing directly in the asset class.
The Best ETFs for 2021/2022
Now that you know all about what are ETFs, along with their benefits and disadvantages, what are some of the best ETFs to start your investing journey?
While there is no clear answer as to what the best ETFs are, higher-risk investments may appeal to the risk profile of younger investors, as they have the time to benefit from long-term trends and to build wealth through ETF income stream, while retirees might prefer lower-risk investments.
Here are some to think about, with your risk profile in mind.
Top Gold and Silver ETFs
Gold and Silver are both defensive, or safe haven, assets. This makes them a popular choice during times of economic uncertainty, as well as in high-inflation environments. Some ETFs are backed by physical gold holdings and many are listed globally.
- Short-Term: SPDR Gold Shares ETF CFD (GLD), due to its strong liquidity and lower transactions costs associated with bid/ask spreads.
- Long-Term: iShares Gold Trust ETF CFD (IAU) is an option because its annual expense ratio is 15 basis points below GLD. Swap fees may occur and past performance does not dictate future results.
Best Real Estate ETFs
Real estate investors can get diversification benefits from real estate investment trusts (REITs) of various types.
A REIT is an entity that develops or manages real estate properties to produce income. There are many types of REITs, including residential, commercial (e.g., factory outlets, health care facilities, hotels, office and shopping centres), industrial, and mortgage REITs.
Some portfolios in this category also invest in real estate operating companies. Here are some of the top-ranked real estate ETFs:
- Vanguard Large-Cap ETF CFD (VM)
- SPDR Dow Jones International Real Estate ETF CFD (RWX)
- Schwab U.S. REIT ETF CFD (SCHH)
- Apple Hospitality REIT Inc ETF CFD (APLE)
Best Vanguard ETF
Vanguard is a pioneer in the field of ETFs and is one of the world's largest and cheapest providers. It has about $7.2 trillion in global assets under management, as of January 31, 2021.
The Vanguard FTSE Developed Markets ETF CFD (VEA) is one to watch, as one of the 3 largest US listed ETFs.
Best Index ETFs
While many investors will be happy with the performance that the S&P 500 index over the last few years, some will seek to diversify their portfolio and find other markets that can increase their overall returns.
Some investors may also want to invest in something they know more about, such as technology stocks. The Nasdaq 100 index, which includes many of the world's top technology shares, is up 27.24 points as of November 29, 2021.
So how can you invest in the Nasdaq 100 index?
For example, there is the First Trust NASDAQ-100 Technology Index Fund (QTEC) ETF CFD.
This gives the investor an exposure to a wide range of technology shares such as Facebook, Apple, Amazon, Netflix and Google, in the form of an ETF.
Best Growth ETFs
What are growth ETFs? Simply, these ETFs are considered to possess growth characteristics, rapidly growing sales, and relatively high price-to-earnings ratios. They include:
- Vanguard Growth ETF CFD (VUG)
- Technology Select Sector SPDR Fund ETF CFD (XLK)
- Consumer Discretionary Select Sector SPDR Fund ETF CFD (XLY)
- iShares Nasdaq Biotechnology ETF CFD (IBB)
If you're curious about trading ETFs but are not sure if you're ready to get started, why not open a free demo account?
A demo account allows you to trade the live markets, using a virtual account balance. This means you can get used the trading platform, decide which strategies work best for you and better understand the ETFs that most interest you, all of which can prepare you for when you start trading with real capital in a live account.
Best Dividend ETFs
Investors seeking dividend yields have plenty of ETFs to choose from. But bear in mind that while a company's dividend track record can be informative, it cannot be relied on as a forecast of future dividend yields. Neither the earnings nor the earnings/dividend pay out ratio in the past can be relied on to occur in the future.
Dividend-driven investors should look at:
Best Artificial Intelligence ETFs
Artificial intelligence (AI) is a field of computer science that focuses on creating intelligent machines that can work and make decisions like humans.
Some ETFs focus on this area and these are likely to benefit from the increased use of AI in various aspects of industrial or non-industrial robotics, automation, social media, autonomous vehicles, and natural language processing.
Some funds specifically invest in companies that develop AI, technological improvement, as well as development of new services and products. Some examples include:
Invest in ETFs and ETF CFDs with Admirals
In this article we've answered the question 'what are ETFs?', and outlined the benefits and disadvantages of investing in them, and shared our opinion about some top ETFs for 2021 and 2022.
If you are ready to start investing in ETFs, it's essential that you choose a reliable ETF broker.
Admirals is an award-winning, regulated broker that offers ETFs via our Invest.MT5 account. If you want to trade on 15 of the world's largest stock exchanges, with access to FREE real-time market data, advanced chart and technical analysis, a state-of-the-art trading platform and more, click on the banner below to open your account today.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.