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Trading Exchange Traded Funds (ETFs)


The idea behind ETFs is to track the performance of a specially selected basket of assets. Usually those include blue-chip stock indices (US30, UK100), sector indices (such as the Real Estate Index ETF) as well as commodities (precious metals, copper, crude oil).

ETFs spread your money across a larger batch of assets, compared to you buying a few specific shares or indices. This gives you the opportunity to buy a diversified portfolio under the form of a single share, with lower costs than buying each single asset individually.

Unlike indices, ETFs are traded like shares on the major stock exchanges. Index ETFs aim to mirror the respective indices as closely as possible, and any changes in the composition of the index will be reflected in the ETF too.

The simple structure of ETFs and the way they operate result in low management costs, mainly due to their passive investment strategy, compared to mutual funds, for instance, which actively rebalance their portfolios.

ETFs provide an efficient and simple way to invest in different segments of the economy. For example, the Energy Index ETF (VDEETF) aims to track an index composed of US energy stocks. Its portfolio consists of shares of corporations involved in the exploration and production of energy products like coal, natural gas and oil.

In a nutshell:

- An ETF is a basket of securities usually based on an existing index or different commodities.

- ETFs are traded like shares on various global exchanges such as the NASDAQ and NYSE.

- ETFs provide you with an efficient and simple way to invest in different segments of the economy by trading niche markets.

- You can trade ETF CFDs just like trading Share CFDs: simply log into the trading app and place a Buy or Sell order.


Deltastock offers trading in the most popular European and US ETFs as CFDs. See the full list here.


Example ETF CFD trade

Let’s say you have high expectations for the US real estate market and are interested in shares of companies that purchase office buildings, hotels and other real property. You could open a position in the Real Estate Index ETF (VNQETF), which tracks the index representing the performance of a large portion of real estate securities in the US.

If you have $2,000 in your account and want to buy 100 CFDs on the Real Estate Index ETF (VNQETF), priced at $80 each, this will give you a total transaction value of $8,000.

If the required margin for that ETF is 10%, then you need $800 ($8,000 x 10%) to place a trade. This means that $800 will be blocked in your account as margin, and the remaining $1,200 will be available for trading.

If the ETF’s price increases by $5 to $85, you will realise a profit of $500 (100 x $5). These $500 will be added to your account and you will now have $2,500, with the blocked amount being $850 (100 x $85 x 10%) and the free margin: $1,650.

Now you have two options:

  • Cash in your $500 profit by selling your ETFs at the current market price of $85, in which case you will have an account equity of $2,500,
  • or hold on to your ETFs in anticipation of a more favourable price (such as an increase to $90, which will bring you an additional $500) but also risking a price drop.

If instead of climbing, the price drops by $5 to $75, you will lose $500, which will be deducted from your account. The blocked amount will become $750 (100 x $75 x 10%), and the free funds will shrink to $750, which will give you an account equity of $1,500.

Now you have two options:

  • Sell your ETFs at the current market price of $75 in order to minimise higher future losses, in which case your account equity will remain at $1,500,
  • or hold on to your ETFs in anticipation of a more favourable price – but at the risk of a further price drop.

Dividends

A dividend is part of a company's profit that is distributed among shareholders.

Unlike indices, each ETF has its own calendar for dividend-related payments, which does not coincide with the calendar for companies included in the respective ETF. When there is a dividend-related payment, this will be reflected in your account if you have an open position in that ETF.

If you are holding a long position, your broker will pay you a dividend, while if you are holding a short position, the dividend amount will be withheld from your account.

Find out more about dividends in CFD trading: what is an ex-date, how it affects share prices, and how are dividends calculated.


Interest

When trading on margin, you actually borrow money from your broker in order to open a position. Interest on the borrowed amount is either charged or received if you have open positions in ETF CFDs, which have to be transferred to the next business day (00:00 h EET).

Note: When trading ETF CFDs on 100% margin (Cash CFDs), interest is neither charged nor paid.

If you are holding a long position, interest will be withheld from your account.

If you are holding a short position, interest will be paid to you if the interest rate on your position is a positive number. Interest will be withheld if the interest rate on your position is a negative number.

Find out more about interest in CFD trading: when is it charged or received and how is it calculated.


Additional educational resources:

Contracts for Difference (CFDs) explained


Note: Views expressed here are for education purposes only and are not the views of Deltastock or its employees. These views are not personal recommendations or investment advice. Any quotes of financial instruments displayed on this page are indicative only and do not reflect the current market situation. You may wish to seek independent advice before entering into transactions.