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Invest in ETFs | What is an ETF?

Your capital may be at risk. This material is not investment advice.

Did you know that there are some funds that cover a group of assets but are listed as a single instrument on the stock market? Can you tell what an ETF is and how it works? Do you want to learn how to invest in ETFs? If your answer is yes, keep reading!

This article explains everything there is to know about investing in ETFs:

  • What is an ETF on the stock market
  • Types of ETFs available:
  • Stock ETF
  • CFDs on ETFs
  • Of funds
  • Of indices
  • Index ETF and many more
  • Where to invest in ETFs
  • Best ETFs to Invest 2020

Investing in ETFs - What is an ETF on the stock market?

Well, the “Exchange Traded Fund” or ETF is nothing more than a listed investment fund. Unlike trading stocks or other assets, the ETF can encompass a wide range of markets in which the trader can invest his money. In this article we are going to explore, what is an ETF actually:

  • The origin of ETFs
  • Her CARACTERISTICS
  • Advantages
  • Risks

ETFs can include a wide range of asset classes, from the traditional stocks of a company to other instruments such as currencies or commodities. Additionally, ETF structures allow investors to diversify, take advantage of leverage, and avoid short-term taxes on their earnings.

How to invest?

Like a publicly traded company stock, an ETF can be traded for the duration of the session, with a ticker symbol and an intraday price.

The market price of an ETF generally stays in line with the underlying securities it replicates. Since ETFs were created for individual investors, institutional investors still maintain liquidity and track the integrity of ETFs by buying and selling units.

As the price of an ETF deviates from the value of its underlying asset, market arbitrage occurs to align the price of the ETF with the value of the assets it replicates. In general, exchange-traded funds are excellent investment options. They can be bought and sold in real time, just like stocks, and have lower trading fees. ETFs are also beginning to replace mutual funds among investment preferences.

ETF Features

These are some of the characteristics of ETFs that help us understand what is an ETF:

  • It is traded as an equity security, as if it were a stock, which makes its price visible in real time.
  • It can be sold or bought at any time during the session.
  • It works as a single source containing various financial instruments, including fixed income securities.
  • It is not closed exclusively to corporate investors or large participants in the financial markets.

ETFs advantages

When investing in ETFs these are some advantages. What is an ETF and what are the advantages:

  • Access to a wide range of financial assets through a single instrument. Diversification.
  • Tax Efficiency – Investors can have better control over when they pay capital gains tax.
  • Fewer commissions: broker commissions will be applied.
  • Wide contracting time frame: they can be settled after the market closes.
  • Investors can place a variety of different orders (limit orders, limit loss orders, buy orders on margin, etc.) that are not available with mutual funds.
  • Lower risk thanks to diversification.
  • The commissions are much lower than the investment standard.
  • The flexibility allows investors to participate in the market through limit orders or at market price.
  • They have no minimum investment. This is determined by the limits established by the broker you work with

Disadvantages for retailers

Settlement: ETFs are settled two days after they are sold.

  •  Illiquidity: depending on the underlying, some funds are less liquid and therefore more expensive to trade.
  •  Price discrepancies: the price of the underlying and the fund are not always in line.
  • Trading costs: small or low frequency investors can find cheaper investment alternatives.
  •  ETFs are guided by net asset value.
  • A spread is implicitly paid when buying or selling a position in the ETF.
  •  There may be costs of staying in an ETF, so it is advisable to first assess the expenses involved in having an open position in an ETF.

Risks

There are always risks associated with investing. However, there are some specific risks when it comes to investing in ETFs that are important to be aware of.

  • Market risk: ETFs are designed to track a basket of stocks, an index, commodities, or even a derivatives contract (like oil futures, for example). So you will make a profit in good times, but you will also take a hit when the market crashes. Since you cannot change the structure of the ETF, when you are trading you have no choice but to follow the performance of what the ETF is doing, be it good or bad.
  • Too much choice: As ETFs continue to grow, so does the choice of what to invest in. For example, investing in a biotech ETF may seem simple. However, the difference between the best performing biotech ETF and the worst performing biotech ETF was over 18% in just a few years. This is because one ETF owns a company that is looking to cure cancer and the other ETF has companies that provide the tools for the life sciences industry.

Index ETFs, like the S&P 500 index, are the most common ways to invest in ETFs. This is because they provide the most liquidity and are likely the best place to start when investing for the first time.

What is an ETF that is leveraged?

According to Investopedia, the basic definition of a ‘leveraged ETF’ is a fund that uses financial derivatives and debt to amplify the returns of an underlying index.

These funds aim to maintain a constant amount of leverage over the investment time frame, such as a 2: 1 or 3: 1 ratio.

Leveraged ETFs use financial derivatives and debt instruments to constantly amplify the returns of an underlying index.

Due to the mathematical nature of these funds, the performance of investing in long-term ETFs will not necessarily match the index it tracks, especially those that are designed to act in a reverse way to the equity index.

As with other financial instruments, proper risk management is essential. It is important to establish a level of losses not exceeding 5-10% of the capital.

ETF types

There are a variety of fund ETFs and stock ETFs that you can trade, such as:

  • By country: you can get in to the stock markets all around the planet that would otherwise have been difficult for you to access. Fx., if you do think that the Taiwanese stock market will go on a lucky streak and increase, then you could trade the iShares MSCI Taiwan ETF.
  • Commodity specific: Through CFDs on ETFs, just like SPDR S & P Metals & Mining ETF, will give you some attention and exposure for the global metals and not least the mining market, more than going to find the right metal for you to trade, or the mining company good for a new investment.
  • Index specifics: As we’ve already been working on, you can trade the ETF on the S&P 500 index through the Vanguard S & P 500 ETF.

There are a lot different types of ETFs you can choose from.

However, one area that has always fascinated investors is finding the best tech stocks and tech ETFs for trading. After all, we are using technology in our daily lives, and they are always leading the way with their innovations. So, let’s look at the technology ETF sector in a little more detail:

Best ETFs 2020

Best ETFs – Technology Sector
Within the S&P 500 Index’s more than $ 20 trillion market capitalization, more than 20% goes to technology stocks. This makes it the largest group in the overall index.

Traditionally, investors have stuck to broader market indices like the S&P 500.

However, since markets are changeable and new products are available to investors and traders alike, they can take advantage of movements within these niches. Let’s take a look at some examples:

  • If you invested $ 10,000 in the Vanguard 500 Index (which tracks the S&P 500) on February 28, 1997, 20 years later, the investment value would have increased to more than $ 40,000. The following chart shows the price of this ETF in recent months.
  • If you invested $ 10,000 in Apple on December 31, 1980, almost 30 years later, in February 2017, you would have a sum of $ 2,709,248 after achieving an annual return of 16.75%. If you made an investment of $ 1,000 in May 1997, then by September 2018 it would have grown to about $ 1,362,000If you want to invest in technology ETFs, you will find a great variety, for example, the Technology Select SPDR Fund ETF (#XLK). It includes 75 stocks, including industry heavyweights like Apple, Microsoft or Facebook.This technology ETF traded in range for much of 2015, and half of 2016. Trading in range means that price movement is contained between two levels. Neither buyers nor sellers take control.

How do we know this? Through the use of trading indicators.

The two lines that appear in the chart above are moving average indicators. They help determine if the market is trending or not. Basically, they calculate a user-defined amount of previous closing prices, then find the ‘average’ price.

They are then represented in the graph, like the one above. The green line is the 20-period simple moving average, and the red line is the 50-period simple moving average. In essence, these lines have plotted the average price over the last twenty to fifty candles.

However, what is more interesting for traders is that during the trend period, when the moving averages are moving up smoothly, this indicates a strong trend that is increasing.

While the technology ETF that we have seen above covered a wide range of technology stocks, this ETF is much more specific.

As the word ‘semiconductor’ in the title suggests, this ETF targets companies of manufacturers of semiconductors for electronic devices.

This ETF contains some of the largest hardware companies in the sector, such as Nvidia Corp and Intel Corp, among others. Through the use of support and resistance levels, traders can observe that this ETF registered a marked uptrend throughout 2019 and until mid-February 2020, the month in which it collapsed in line with the rest of the financial markets due to the outbreak of the coronavirus pandemic.

Vanguard ETF

The second-best US ETF by asset, Vanguard, had $ 869.6 billion in assets under management on April 11, 2018.

The Vanguard FTSE Developed Markets ETF (VEA) fund was one of the largest. The VEA has an annual yield of 5.1% in the last 10 years and between January and September 2019 it has appreciated by 13.1%, according to Investopedia.

It owns nearly 4,000 shares, with an average market capitalization of $ 28.5 billion. Its most representative companies are Royal Dutch Shell, Nestle, Samsung Electronics, Novartis and Roche Holding.

Index ETF

As a lot of traders and investors will be glad with the level of the S&P 500 Index has achieved over the few years, through early 2020, some will prefer to go in another direction with their portfolio to find other markets where they can find profitable investments.

Some investors will also be more interested in investing in something they are more familiar with and has more experience in, that could be fx. tech stocks. The Nasdaq 100 Index, which lists the top 100 tech stocks, has also shown great strength in recent years.

This is a reason why many investors are getting in to investment and learning how to get good.  They are learning all about how to invest in ETFs and are looking for the ETFs with the best performance. When they have found a possible Nasdaq ETF they want to trade, then it can make a big difference.

So how could you have invested in this particular index?

On the Nasdaq 100 index you can see quite many ETF’s which are performaning . Fx. there is the (QTEC) ETF also called First Trust NASDAQ-100 Technology Index Fund. Investors shown a large range of stocks on the tech market, mainly companies from Silicon Valley, companies such as Amazon, Google and Netflix, in the form of ETFs. But, there are other areas and sectors that pro traders should look closer into.

We hope that we have clarified the doubts about  what is a ETF. We are going to detail some of the advantages of trading with ETFs.

Growth ETF or Growth

In general Growth ETFs has growth characteristics, and are rapidly increasing in sales, and high cost / benefit ratios.

  • ETF CFD (VUG) – Vanguard Growth
  • iShares Nasdaq Biotechnology ETF CFD (IBB)
  • Technology Select Sector SPDR Fund ETF CFD (XLK)

Dividends
Investors looking for returns through dividends have many ETFs to choose from. However, while a company’s dividend payment history can be informative, it cannot be analyzed in isolation.

The profit / dividend ratio of the company in recent years does not necessarily provide a solid indication of what will happen in the next year.

With that said, investors should pay attention to these ETFs:

  • (IYR) – iShares US Real Estate / ETF CFD
  • (PGX) – PowerShares Preferred Portfolio / ETF CFD
  • (SDYUS) – SPDR S&P Dividend / ETF CFD
  • (SCHD) – Schwab US Dividend Equity / ETF CFD

Best ETFs - Artificial Intelligence

Artificial intelligence is a field of computing that consists of the creation of intelligent machines that can do stuff just like humans, which includes doing every day things, take decision but also most important is, they can work. ETFs related to artificial intelligence can benefit from the development potential of this sector, in particular from different corners of industrial sector or nonindustrial robotics, social media, automation, autonomous vehicles and natural language processing.

They are funds that have at least 25% exposure of the portfolio to companies that spend a lot on artificial intelligence (AI) research, such as Tesla, Amazon or Alphabet.

These funds specifically invest in companies that develop artificial intelligence, technological improvements, and development of new services and products. The AI ​​is used to select individual securities for inclusion in the fund. Some examples include:

  • (QQQ) – PowerShares QQQ  / ETF CFD
  • (XLK) – Technology Select Sector SPDR Fund / ETF CFD

Best ETFs - Big Potentials

This is the list of other ETFs from different sectors such as financial, health, energy, aerospace or defence that present great growth potential.

  • (OIH) – VanEck Vectors Oil Services // ETF CFD
  • (XBI) – SPDR S&P Biotech // ETF CFD
  • (ITA)- iShares USA Aerospace and Defense // ETF CFD
  • (KBE)- SPDR S&P Bank // ETF CFD
  • (SCHV)- Schwab USA Large Cap // ETF CFD
  • (XLF)- Financial Sector Selection Fund SPDR // ETF CFD (XLF)
  • (VWO)- Vanguard FTSE Emerging Markets // ETF CFD (VWO)
  • (ITB)- iShares US Home Construction // ETF CFD (ITB)
  • (IXC)- iShares Global Energy // ETF CFD (IXC)

ETFs or traditional banking

When you intend to invest for the future, it can be helpful to analyze the possible returns in different investment scenarios.

In this case, we will see how to invest in a savings account instead of investing in the stock market.

  • Bank interest rate with a one-time investment: Suppose you invest € 1,000 in a simple savings account, which pays an interest rate of 3% per year. If you left the money in the bank for 40 years, how much would you have? Well that jackpot would have risen to $ 3,262.04 (life wouldn’t change for most people).
  • Let’s see if we can try to increase the overall performance in the second scenario. Bank interest rate with regular investments: Now, imagine that you also managed to save an additional 100 euros per month. With the same initial 1,000 EUR and the same 3% interest rate, in 40 years the same bank account would now have EUR 95,207,23.
  • Stock Market Returns with Regular Investments – We already know that regular investing trumps singular investments, as shown by the returns in Scenarios 1 and 2.
  • Now let’s say we go to the stock market to try to increase our annual profit percentage. The S&P 500 Index, which tracks the 500 largest companies listed on the New York Stock Exchange, returned about 10% annually between 1928 and 2017.
  • An initial investment of 1 000 EUR, with regular monthly investments of 100 EUR, at an interest rate of 10%, in 40 years you would have 604 720.00 EUR!

Of course, this is just a hypothetical example, and returns will vary as past performance is not indicative of future performance. However, it is pretty clear why billionaire investors like Warren Buffett invest in the stock market.

CFDs vs ETFs

Contracts for difference (CFDs) and exchange-traded funds (ETFs) are two of the preferred trading options for those investing in the markets.

What are CFDs and ETFs?

A contract for difference or CFD is a high risk product, whereas the exchange-traded fund generally tracks an underlying index and is considered low risk.

How does an ETF work? An exchange-traded fund is an efficient and low-risk way to gain access to several specific markets.

For example, Australian equity or Australian bond ETFs track indices, offering instant diversification benefits across a portfolio of underlying assets.

The underlying assets are held in trust under external custody on behalf of the investor. This minimizes the counterparty risk of the ETF issuer.

ETFs are considered low-cost investments, as you only pay a small annual management fee.

Active trading vs passive investing

The CFD is a contract between the trader and the broker can be purchased and sold on an initial price based on an underlying asset in the hope of achieving profitability if the market has moved in our favour.

CFDs, on the other hand, offer the great advantage of being able to short a group of assets or a market. ETFs, in turn, are often an investment vehicle used to hold our funds.

CFDs, being high risk, are traded on shorter time frames. In other words, this instrument is ideal for short-term strategies.

You can also use a CFD to hedge an exposure in ETFs, but otherwise it would not be possible.

In this case, equity ETFs could be attractive to an investor as when a particular sector is hot it is common for all stocks related to it to be affected.

One of the biggest differences between CFDs and ETFs is that the former are generally used more for speculation, while the latter are typically used for longer-term investments. As they are leveraged products, CDFs are traded on a day-to-day basis.

CFDs are a derivative product, so they allow considerable leverage. This means that higher returns than what could be achieved with the same capital can be accessed by investing in other financial instruments.

However, it must be borne in mind that CFDs are complex instruments and involve a high risk of losing capital since, in the same way that leverage allows multiplying profits, it also increases losses in case the market goes against them. our position.

Active investment:

If you prefer to trade on margin and not have to invest the entire value of the position, you can do it through CFDs. Of course, operating on margin can increase profits, but also losses.

Passive investment:

As a trading alternative to CFDs, ETFs are best for those looking for a more passive investment, with a buy and hold strategy. For example, if the ASX 200 rises or falls by 15%, so will the ETF that tracks the ASX 200.

ETFs can be traded on the stock market, which means that they can be used as if they were shares of a listed company.

However, CFD trading is a great way to access a wider range of different markets around the world using a broker account.

Inverse ETFs:

There is one type of ETF, called inverse, that does an inverse correlation to the indices that they replicate. ETFs that behave inversely to indices will gain value (go up) when the index goes down in value (go down) and vice versa. ETFs are also available in a way that can multiply the difference. For example, an ETF can go up twice as much as the index. This is what many investors and traders are really looking for.

If you want to try CFD or ETF trading, make sure you have a long-term trading plan and understand all the risks involved in these financial products before making an investment.

Warren Buffett and the S&P 500 Index

Warren Buffett, nicknamed the ‘Oracle of Omaha’ is one of the greatest investors of all time. At his company shareholders meeting in 2004, Berkshire Hathaway, an investor asked the billionaire whether he should buy Berkshire Hathaway stock, invest in an index ETF or hire a manager to do so.

This was part of Buffett’s answer: “Just go for a broad index like the S&P 500. Don’t put all your money in at once and do it over a period of time. Vanguard. Reliable and low-cost.”

What do you mean by Vanguard and the SP500 ETF? It refers to the ETF that we have already cited in this article called ‘Vanguard S&P 500 ETF’.

Conclusión

Investing in ETFs  gives you access to a greater and diverse area on the trading market. FX, there is a good chance to find some of the most profitable and best technology ETFs or you could dig deeper and find an ETF that has more focus on hardware and/or security in cyperspace.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future. In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.
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