Investing in ETF

ETFs are special investment funds that are traded with an exchange like equities and whose investment objective is to replicate the performance of a benchmark index. The main advantages of ETFs include the reduction of risk due to the diversification of the securities of the replicated index, low management costs, the flexibility of its structure and the informative transparency of trading. It can, therefore, be summarised by stating that these instruments combine the greater security of the funds with the practicality of the shares.

With ETF CFDs, you can trade ETFs from the comfort of any internet-connected device, which can be a desktop computer, a tablet or smartphone. Below we will illustrate all the features of this financial instrument, which is very interesting both for investment and for trading with short-term objectives.

How ETFs work

Unlike mutual funds and Sicavs, ETFs (Exchange Traded Funds) are passive and listed on the stock exchange. Passive management consists in the fact that the return on these instruments is linked to the listing of a stock exchange index, so its value does not derive from the trading ability of the fund manager. Therefore, instead of concentrating on “selling well” the fund, the ETF manager’s sole objective is to verify and maintain the consistency of the fund with the reference index and to carry out all the operations necessary for the value of the ETF to deviate from that of the replicated index. For example, when a security in an index has large changes due to acquisitions, bankruptcies, mergers, and other similar events, the ETF manager will need to ensure that the ETF still manages to maintain the price of the index to which it refers. The operation of trying to bring the ETF quote as close as possible to that of the replicated index is called rebalancing. It is important to repeat and highlight that the rebalancing of the ETF portfolio will never be a concern of the trader, but only of its manager. If, for example, a share is removed or added to a certain reference index, the ETF manager will ensure that the same share is included in the ETF, in order to align the ETF’s performance with that of the replicated index. The difference between the value of the ETF quotation and that of the benchmark index must necessarily be around 1 or 2%.

Short-term ETFs

Some brokerage firms offer the possibility to sell ETFs short. This operation is technically called short selling and is used by many as a hedging strategy. With short ETFs, you can then open a position downwards, i.e. pointing downwards a certain ETF and its reference index. It should be noted that with ETF CFDs you can open downward (as well as upward) positions on all types of ETFs.

ETF Dividends

Like shares, ETFs can also pay dividends. This is a common feature with both shares and investment funds. ETFs that pay dividends are called distribution ETFs, which differ from accumulation ETFs. Distribution ETFs are set up in such a way that dividends are paid periodically, whenever they are detached and paid by the company. Accumulation ETFs, on the other hand, is set in such a way that the reinvestment is valued.

Structured and leveraged ETFs

In addition to the “standard” ones, there are also structured and leveraged ETFs. Structured ETFs have very specific characteristics such as:

  • The possibility of replicating more than proportionally to the performance of an index and in this case, leveraged or leveraged ETFs. The objective is to replicate the fund in such a way that its price is a multiple of the benchmark.
  • the possibility of replicating the reference index in reverse order
  • the presence of specific portfolio protection instruments
  • the implementation of more elaborate investment strategies including those called buy-write or covered call. In practice, you open an upward position on the benchmark and at the same time, the sale of a call option on the same benchmark with specific settings.

Unlike normal ETFs, structured ETFs have a more complex mathematical model. However, as it is decided in advance, the management of this fund will also be passive.

Collection of ETF allowances

Whether structured or not, the collection of ETF shares works in the same way. In fact, they can be created and redeemed continuously by authorized intermediaries with the assurance that the market price always corresponds to the Net Asset Value of the fund (NAV), and with the guarantee that (especially in the case of structured) the ETF is liquid with the reference market. These characteristics along with the NAV reduce the risks of investing in ETFs, whether you buy them at a premium or sell them at a discount.

Sectors that invest in ETFs

Investing in ETFs allows you to take upward or downward positions on a wide range of sectors of the international economy, which may relate to certain countries or areas or to the entire market. Its composition, given by a wide range of securities, allows obtaining a wide diversification that greatly reduces the risk of the investment. Equity ETFs refer to stock indices of a given country or to international indices. The composition of equity exchange-traded funds is based on indices for specific production sectors or geographical areas. Commodities ETFs refer to indices for certain commodities. For example, they may replicate indices that are composed of futures as well as shares of companies operating in a given production sector related to the reference raw material. Bond ETFs replicate indices that are composed of bonds of various kinds. Currency ETFs, which are mainly suitable for trading rather than investment, refer to the currency exchange market and indices dedicated to them (such as Morgan Stanley’s).

Differences between ETFs and other funds

The term ETF now generally refers to all types of financial instruments with the preceding characteristics mentioned above. However, for the sake of completeness of information, it should be noted that there are additional acronyms indicating particular types of instruments that are similar to each other. These include:

  • ETC or Exchange Traded Commodities, which replicate indices that refer to a specific commodity (both at “spot” prices and at futures quotations)
  • ETNs or Exchange Traded Notes are debt securities that replicate a non-equity index.
  • ETFS or Exchange Traded Fund Structured is the Structured ETFs that we have discussed in this article with the most complex structuring and management composition and the lowest risks involved.
  • ETP or Exchange Traded Products is the category that includes all the products described above

Best ETF Platforms

After having seen what ETFs are and how they work, we propose a list of the best platforms that allow you to trade on this particular financial instrument. We would like to underline that in order to trade ETFs effectively, it is essential to rely on a serious and reliable platform. Some online brokers such as Plus500 (one of the best brokers in the world that offer ETFs) provide the possibility to try the platform for free through a demo account with virtual funds:

  • Plus500: definitely the most complete web platform that offers ETF services on Forex, indices, commodities, stocks and bonds. Also available is an exceptional mobile version for tablets and smartphones with an intuitive and very easy to use graphical interface. Plus500 is a broker that we certainly recommend to those who have minimum experience in online trading. If you have no experience, you can still mature by practicing for free in demo mode.
  • Markets.com: a real giant of online trading. This company has always presented a very qualitative but diversified range of services and among the platforms provided by this broker is the MetaTrader5, a later version of the famous (but also available) MetaTrader4, a real icon of online trading around the world.

Best ETFs List

On our portal, you can always find regular updates about the best ETFs according to the performance rankings that were made public by the managers of the same funds. One of the most important managers of the Exchange Traded Fund is Blackrock, the largest investment company in the world. It manages the iShares family of ETFs, formerly known as WEBS, whose ETFs replicate stock and bond indices. Alternative examples to iShares are ProShares (managed by a division of the ProFunds Group), Lyxor, ETF Securities, HSBC, Source, Amundi, JPMorgan, Invesco. ETF yields, which are expressed in percentage changes, may be valid for rather short periods of time (e.g. monthly), cosÏ as longer periods (e.g. annual). Every year there is no shortage of excellent investment opportunities, which start from a monthly basis and continue on an annual basis.

ETF Plus

To conclude the article concerning ETFs, it is worth mentioning the ETFplus market, i.e. the Italian Stock Exchange’s electronic regulated market dedicated to the real-time trading of both normal and structured ETFs in which actively managed ETFs are added. On this market, these securities are traded on the Stock Exchange in the same way as equity securities so investors can proceed through their intermediaries to buy or sell ETFs at the market price with the minimum lot being one share. In recent years, actively managed or simply “asset” ETFs have also been proposed, which, unlike their peers who “passively” replicate an index, propose to replicate them “actively”, i.e. with greater discretion on the part of the issuer. Active ETFs have the objective of “outperforming” specific stock or bond indices, i.e., in simpler words, doing better than the reference replicated index.