Why are ETF’s one of the most popular trading instruments

Why are ETF’s one of the most popular trading instruments?

Why are ETF’s one of the most popular trading instruments

 We look under the hood of one the latest additions to the Trading 212 portfolio

Exchange traded funds (ETF’s for short) have become one of the rapidly expanding instruments in recent years and we duly obliged by updating our product lineup by including, what we feel, cover some of the more important and interesting funds.

But what are these funds and what makes them so appealing to both retail and institutional investors?

First lets go over what funds are – it’s people’s or organisation’s money, grouped together, investing in the same way, for a, hopefully, increased benefit and profit. Larger pools of money can purchase more expensive stocks, or make more long-term investment. Not to mention that they are better equipped to weather any negative volatility with their increased size. Think seven-storey ocean liners in a storm.

There is a multitude of funds operating on the global markets – mutual funds, hedge funds, pension funds, sovereign funds all of them with their different agendas, styles of investing, risk/reward targets, etc. Their structure generally follows some common principles, chief among them that they invest in The difference between all of these and ETF’s is that the latter are actually tradeable on the market. They look like a fund, but behave like a stock. This means they can be bought on margin and shorted when you think the components of the fund are in for a bad period.

There exist two main types of ETF’s – those that cover separate countries and the so-called “sector” ETF’s. Country ETF’s offer you the chance to invest by proxy in a country which you have a strong opinion about, be it positive or negative. The ETF for say China contains in itself a list of companies that are structural for the local economy and their well-being reflects that of the overall economy. You wouldn’t be able to invest there as a retail trader, as the local stock exchange still imposes restrictions of foreign investment and stock trading.

ETF’s are liquid, through the Trading 212 PRO Platform you can trade them at all times during the market session and this isn’t even among their most important advantages. One is that you don’t need to perform the trades with all the instruments included in the fund (if they’re available in the first place). Which results in less time needed to perform the trade.

Financially there is also an upside – effectively there is a smaller spread. If for example you had to make ten trades with the companies in the Banking Sector ETF, then for each of them there would be a spread, added up they are considerably higher than the one we have in place for our ETF’s.

Country ETF’s are very flexible instruments. Researching them is generally seen as easier than that for currencies or stocks, although it has some underwater currents of its own. But it definitely lets you invest in a certain country in a straightforward way. The companies usually included in a country index are either the largest, or the most (structurally) important ones. Or both of course. They are blue chip companies who are diversified and connected with multiple other companies in the respective country and they influence the supply and demand of many products in the local economy.

One bonus that has to be mentioned with country ETF’s is that you can trade something that may not be readily available to a retail trader. A Korean company may be included in an ETF, but not the local index KOSPI, . The BRIC countries are the one’s we deliberately added – we have ETF’s for Brazil, Russia, India and China, so you can now invest in the emerging markets of the world.

Sector ETF’s are the other variation that we now offer. They are focused on the different components of an economy and take companies with a similar line of work. These are usually competitors, so you can’t play off their weaknesses compared to each other, but you can actually trade on them compared to other sectors. As this is a quite a large subject and the trading style of many an investor, next week we will be dedicating a separate article to them.

With the ETF’s we have, we hope to provide access to something that larger traders and investors usually sink their teeth in, but by accessing them from our platform, anyone can do it a lower cost and in an easier way.

Do you have any other particular instrument that you’d like to trade with us? ETF’s were added due to client requests, we answer those.

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