The idea behind Stock Exchange traded funds is to follow the presentation of a specially selected basket of assets. Typically, these include blue-chip indices (US30, UK100), sectoral indices (such as the Real Estate Index ETF) or commodities (precious metals, copper, crude oil).
Exchange traded funds allocate your money to a large group of assets, as opposed to buying certain stocks or indices. This allows you to purchase a diversified investment portfolio in the form of a single share – at lower costs than buying each asset individually.
Unlike the indexes, ETFs are traded as stocks on major stock exchanges. ETFs on indices strive to reflect the relevant indices as accurately as possible – any changes in the composition of the index will also be reflected in the ETF.
The simplified structure of Stock Exchange traded funds and the way they work mean low management costs, largely because of their passive investment strategy compared to mutual funds, for example, which actively rebalance their portfolios.
Exchange traded funds provide a simple and efficient way to invest in different sectors of the economy. For example, the Energy Index ETF (VDEETF) seeks to follow an index comprised of US energy shares. Its portfolio consists of shares of corporations involved in the development and production of energy products such as coal, natural gas and petroleum.
– The Exchange traded fund is a basket of securities, usually drawn up on the basis of an existing index or different commodities.
– ETFs are traded as shares on global exchanges such as NASDAQ and NYSE.
– ETFs provide a simple and efficient way to invest in different sectors of the economy by trading niche markets.
– You can trade CFDs on an ETF as you trade CFDs on stocks: simply enter the trading app and place a buy or sell order.
Deltastock offers trading with the most popular European and American ETFs, such as CFDs. See the full list here.
Example of ETF trading
Let’s assume that you have high expectations for the US real estate market and are interested in trading shares in companies that buy office buildings, hotels and other real estate. You can open a position on the Real Estate Index ETF (VNQETF), which follows the index representing a large number of US real estate companies.
If you have $ 2000 on your account and you want to buy 100 CFDs on the Real Estate Index ETF (VNQETF) for $ 80 each, it will give you a $ 8,000 deal value.
If the required margin for this ETF is 10%, then you need $ 800 ($ 8,000 x 10%) to make a deal. This means that $ 800 will be blocked on your account as a margin and $ 1200 will remain at your disposal for trading.
If the price rises by $ 5.00 to $ 85, you will earn $ 500 (100 x $ 5). This $ 500 will be added to your account and you will have $ 2500 of funds, with the blocked funds being $ 850 (100 x $ 85 x 10%) and free $ 1650.
In this case, you have two options:
Stack your $ 500 profit by selling your ETFs at the current $ 85 market price, with $ 2500 in your account,
or keep your position in anticipation of a more favorable price (such as a raise to $ 90, which will bring you another $ 500), but with a risk of falling in price.
If instead of rising, the price drops by $ 5 to $ 75, then you will lose $ 500 that will be deducted from your account. The blocked amount will be $ 750 (100 x $ 75 x 10%) and free funds will decrease to $ 750, which will give you a $ 1500 account balance.
In this case, you have two options:
Sell CFDs on the ETF at the current market price of $ 75 to minimize larger future losses – and your account balance will remain $ 1,500,
or hold the position in anticipation at a cheaper price, risking an even bigger drop in price.
A dividend is part of the profit of a company that is distributed among the shareholders.
Unlike the indexes, each ETF has its own calendar for dividend payments that do not match those of the companies included in the ETF. When there is a dividend payment, this will be reflected in your account if you have an open position in this ETF.
If you hold a long position, your broker will pay you a dividend, while in a short position the amount of the dividend will be deducted from your account.
Learn more about CFD dividend dividends: what is ex-date, how it affects stock prices and how dividends are calculated.
When trading on a margin, you actually borrow money from your broker so you can open a position. The amount that you take is charged or paid if you have CFD positions on the ETF that have to be transferred for the next business day (00:00 EET).
Important: When trading CFDs on ETFs at 100% margin (called “CFD”), interest is neither charged nor paid.
If you hold a long position, the interest will be deducted from your account.
If you hold a short position, the interest will be paid to your account if the interest rate on your position is a positive number. Interest will be deducted if the interest rate on your position is a negative figure.