What Is ETF Trading?
Most beginner- and mid-level trader or investor will be familiar with Exchange-Traded Funds (ETFs), but what is ETF trading?
Trading, in general, has grown as a popular topic over recent years, as the market has matured in such a way that the stock market is no longer something perceived as only accessible by Wall Street professionals.
What is ETF trading? What are the advantages and disadvantages? Should you trade ETFs, or ETF CFDs? We cover the important factors surrounding this topic.
Table of Contents
Is It Good to Trade ETFs?
Like stocks, an ETF trades on a given stock exchange during trade hours; if you're familiar with trading stocks, then you can apply these same fundamentals to trading ETFs or ETF CFDs.
Where these two types differ, is that a stock is always individual, for example the Apple stock is a standalone tradable asset.
With trading ETFs or ETF CFDs, however, you are typically trading a bundle of securities. This can be within a niche sector of mixed stocks, mixed investment assets, an index (like the S&P500's popular SPY ETF), or mixed commodities. There are many variations and types of ETFs available to the retail investor.
To approach such a question as, "is it good to trade ETFs?", this can only be answered by each individual investor, depending on their trading strategy and risk profile.
However, from a general standpoint and given the growth of ETFs over the years, a general answer would be yes, given the strategy and risk is considered individually. You can learn more about the basics of ETFs here.
It is important to note and differentiate, as we will go into more detail in the next section, what the difference is between ETFs and ETF CFDs, and what kind of activity each are suitable for.
Should You Invest in ETFs, or Trade ETF CFDs?
Contracts for Difference (CFDs) and Exchange Traded Funds (ETF) are two of the preferred trading options for those who trade on the markets.
A CFD is a high-risk leveraged product, while an Exchange Traded Fund generally replicates an underlying index, as discussed and overviewed in the What are ETFs article. For this reason, it is considered to be lower risk.
Depending on your risk-appetite, you can invest in ETFs directly, or you can trade ETF CFDs.
The difference is that investing in an ETF directly is like investing in a share - investors purchase a share of the ETF outright and generally aim to sell it at a higher price for a profit.
The CFD, on the other hand, is a derivative instrument, meaning it's a tool traders can use to trade underlying assets, without owning the assets themselves.
It is a contract between a trader and a broker that can be bought or sold at an initial price based on the underlying asset (in this case, an ETF).
Basically, you can speculate on whether you think the price of an ETF will go up or down, but you don't need to purchase a share of the ETF outright.
If the market moves in your favour, you close the trade (you close the contract), and collect the difference between the opening price and the closing price of the trade as a profit.
If the market moves against you, the difference between the opening and closing price of the trade will be a loss.
When someone invests in an ETF, it is typically seen as a long-term investment - something you buy and hold for several years, with the intention of selling it for a profit in future.
CFDs, on the other hand, are used for active trading - some traders make trades in mere minutes, while others might keep trades open for a few days, weeks or months.
One of the reasons why CFD trades tend to be shorter is due to leverage. As discussed in more detail here, leverage allows you to access a large position for a small deposit, and it amplifies both your profits and losses.
Because of this amplification, these trades either hit their profit targets or the maximum loss a trader is willing to accept, which means trades tend to be closed more quickly than traditional investments.
CFDs can be traded long (meaning you open a 'Buy' trade with the aim that the underlying asset will increase in price, and you can sell it at a profit) or short (meaning you open a 'Sell' trade in the hope that the asset will decrease in price, then you close the trade at a lower price, with the price difference being your profit).
Both of these factors make ETF CFDs a tool for active, short-term trading.
By contrast, ETFs are an option for those seeking a passive investment, with a buy-and-hold strategy.
Below you can see an image taken directly from the Admirals Products page for ETFs – As you see at the top, there is the option to either invest in ETFs via the Invest.MT5 account, or trade ETF CFDs via a Trade.MT5 account.
Admirals Products page (ETF CFDs), accessed on November 30, 2021.
Can You Day Trade ETFs?
Just like listed shares, ETFs and ETF CFDs are traded on exchanges and have real-time prices that fluctuate during trading hours. This makes them suitable for day trading and other trading styles, however as mentioned above, this kind of short-term trading activity may be more suitable with ETF CFDs.
Can You Make Money Trading ETFs?
Naturally, the answer to this question is completely subjective. There is no factual answer as all trader's results are varied, depending on their trading strategy and risk profile.
We do offer an article with a potential scenario as an example, How to Trade ETFs with €1000, if you'd like to further explore this topic.
If you're interested in trading ETF CFDs, it is always recommended that you first register for a demo trading account with us (for free), without using any real capital. You can click the banner below and start trading with the free demo account upon registration:
What are the Advantages of ETF Trading?
Now that you know what ETF trading is and the difference between ETFs and ETF CFDs, here are some of the benefits of trading (and investing) in ETFs and ETF CFDs:
- Lower fees: ETF or ETF CFD trading can be low cost, due to low expense ratios, however you must consider broker fees as well.
- Trading transactions: Traders can place a variety of different orders (limit orders, stop-loss orders, buy-on-margin orders,) which are not available with mutual funds.
- Diversification: As ETFs or ETF CFDs represent a range of assets, they create automatic diversification (and lower risks) for traders.
- No Minimum Investment: This is determined by the limits established by the broker you work with.
- Long or Short: If you trade ETF CFDs, you have the ability to trade long and short, following both the rising and falling markets.
- Trade with Leverage: When trading ETF CFDs, leverage allows you to access a large position size for a relatively small deposit, which can amplify your profits and losses.
- Dividends: When trading ETFs or ETF CFDs, you may receive dividends on both Buy and Sell positions in your Invest.MT5 and Trade.MT5 Admirals accounts.
What are the Disadvantages of ETF Trading?
As we have overviewed the advantages of trading ETFs, we must also outline the disadvantages. It is important to always make yourself aware of both scenarios in any form of trading or investing.
- Potential for Higher Fees: Actively managed ETFs and ETF CFDs tend to carry higher fees, especially when short-term trading.
- Lower Liquidity: Low-volume ETFs are not ideal for short-term trading activity due to low liquidity – however this is not an issue with ETF CFDs, as there is no underlying asset.
- Single-focused Options: Be aware if the ETF CFD chosen to trade with is focused on a single asset or not, as it can be less effective in expected volumes.
- Trading Environment: Popular ETF sectors can be over sought on the market, causing temporary liquidity issues (however, this does not apply to ETF CFDs, as there is no underlying asset).
Now that you understand more about both the advantages and disadvantages, we can recommend to you some further reading on ETF trading strategies.
What ETF is Best for Trading?
A subjective question, it again depends on the personal trading style, risk tolerance and general sector interest of each individual trader.
One aspect which makes ETFs and ETF CFDs such an attractive investment and trading vehicle, is the fact that there are so many options to choose from, from all sectors imaginable. You can see more on the best ETFs for 2021 here.
If you have an interest in cryptocurrency, you may also want to read up on the latest launch of the ProShares Bitcoin Strategy ETF as well.
For a more interactive learning and real trading example, we recommend to watch the below video with experienced trader, Jens Klatt, on the popular ARK Innovation ETF:
As with any good overall trading strategy, diversity is key. There is rarely a right or wrong answer in what kind of financial product is most suitable, as it will always be determined based on the individual needs and goals of the trader or investor.
When answering the query, what is ETF trading, hopefully you feel more informed on the topic in order to form your own educated opinion that works for you. ETF trading or investing, whether it be directly with ETF CFDs or ETFs, is an exciting aspect of the financial world worth exploring. See for yourself by viewing the ETF and ETF CFD options at Admirals.
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.