ETF trading. Features that you need to know how to make money on ETF trading

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ETF trading. Features that you need to know how to make money on ETF trading

ETF Trading

ETF (Exchange Traded Fund) is a specific type of asset traded on the exchange. It is a mutual fund derivative, however, it has one key difference. Exchange traded funds, unlike mutual funds, can be freely traded as assets on the exchange. It is a relatively new type of security that has become widely popular among both investors and traders alike. In this article, we will go through what exchange-traded funds are, where they came from, what is unique about them and how the average user can earn profit from them. An exchange-traded fund, or ETF, is an investment portfolio containing various valuable assets. They can include indexes, company assets, securities, and currencies.

This investment tool, in contrast with mutual funds, has a high level of liquidity, meaning that it can be freely traded on the exchange throughout the day. Although, its price is calculated on the basis of the real asset prices collected in the portfolio. The main reasons investors are drawn in its direction hinges on the opportunities it has to offer and the simplicity of use. The deep level of risk diversification built in is such an important aspect. If you buy an ETF asset, in essence, you are investing funds in the economy as a whole of a specific country. There are even funds that include an array of indexes from various countries.

The History of the Appearance of ETF

Exchange traded funds began their life in the early 90’s. In the US, the first fund created and actively traded on the exchange was launched. At its core is the S&P 500, one of the founding indexes, with a sum total asset price exceeding $300 million dollars. Roughly 10 years later, several hundred exchange funds had been created. Their average price at the time surpassed half a million dollars, but now it is worth over 3 trillion.

A similar situation unfolded in Russia, as did in the States, however later. Only as recent as 2020 have ETFs begun to be traded actively in Russia, as that is when regulations appeared for this type of financial operation. Therefore the total level of investment is clearly lower than in the US and accounts for no more than half a billion dollars. However, this type of asset attracts more and more attention from investors, including everyday people. This can be explained by the low threshold for entrance. You can start earning with balances as low as $50-$100 dollars.

Put simply, what is ETF

Exchange traded funds are an updated version of mutual funds. This description explains little to the reader, as the majority of which likely have a poor understanding of how mutual funds work. Therefore, we will quickly move on to a more in-depth explanation. So, an exchange-traded fund, ETF, is made up through a combination of several different assets, such as possibly industrial exchange indexes, assets of popular companies, and/or currencies. Also, funds can be invested in any desired direction, which the organizers consider to be lucrative.

The ETF funds are spread out between a large number of assets, inherently diversifying the risk. If a problem arises with a particular company, or even the price of an industry in general, it isn’t a deciding factor in determining the final result in terms of the profitability of the investment portfolio. This provides average investors more security on their investments.

Every fund issues its own asset. Their price is determined based on the total size of the fund divided by the number of shares produced. Therefore, all exchange-traded funds traded on the exchange are in effect assets that have added security. The price of specific assets doesn’t directly correlate with the price of derivatives with varying investments in them.

For illustrative purposes and to gain an overall better understanding, an analogy can be made with typical, publicly-traded companies. So, say an organization releases 100 assets of equal price, each shareholder will receive 1% of the total capital. Through the course of the year, the company doubled in size. Each shareholder still owns 1% of the total fund, however, in real terms, their money has doubled.

It is a similar case with ETF. The moment the fund’s balance begins to increase, every contingent stock traded on the exchange also starts to see a price increase. If there is a loss, accordingly, the negative dynamic will be reflected on the exchange as well. When acquiring ETF, investors become for all intensive purposes shareholders, who own a percentage of the investment portfolio put together by the fund creators. However, this doesn’t enable them to influence the portfolio composition (direction of investment), the opportunity begins and ends with the right to buy and sell the asset freely on the exchange at any time.

The advantages of ETF for the average investor

Let’s begin with the main goal of any investor, namely to earn a profit. This article is aimed at normal people, who don’t have a formal education in economics and aren’t familiar with the ins and outs of trading and investing in securities. It is such a complex and wide topic that, in order to truly understand it, you’d need to devote the majority of your life to studying it.

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However, in terms of work, investors and analysts are nearly always different people, each is best off sticking to their own tasks. In this context, exchange-traded funds meet the demand for a simple, transparent and effective tool for profit. ETFs are ready-made investment portfolios, compiled by professionals themselves. All investors need to do is put their funds into a reasonable project, whose price is projected to increase. Without getting into the details, we can note that simplicity is the key factor with exchange-traded funds. That being said, let’s take a look at the advantages of this type of investment in further detail.

Diversification. Exchange traded funds are unique in that their portfolios are comprised of a wide variety of assets. To the extent that they can be comprised of indexes, reflecting in their own right the dynamic capitalization of up to 500 companies. There can be several of these indexes as well. This approach protects your investment from any negative scenarios in terms of growth. If the entire industry is in jeopardy, investors always have time to sell the fund asset on the market, regaining the vast majority of their investment. That being said, these situations rarely arise. Even the complete collapse of one of the companies doesn’t lead to a significant loss in the portfolio, depending on the share percentage. Usually, ETFs are considered unsuccessful when their growth rates are slower than originally projected.

Accessibility. Exchange traded funds offer a unique opportunity to invest in a safe, stable market with a minimal deposit. If you were to take the traditional approach and purchase the company shares outright, then you would need to invest hundreds of thousands of dollars to purchase such a large number of securities. Smaller sums wouldn’t afford you the opportunity to purchase enough assets in the necessary proportion, recommended by diversification guidelines. At the same time, ETF enables you to participate in a portfolio with minimal investment, as ETF is in essence already the asset of a mutual fund.

Stability. The composition of the portfolio changes periodically in reflection of changes in the market. However, as an investor, you shouldn’t be worried about this as there are no fundamental changes to the overall structure. We are speaking more in terms of small corrections that allow analysts to move funds around to what they see as more lucrative directions. Therefore, they serve to stabilize the fund in fast-changing market situations.

Liquidity. ETF is widely popular amongst traders, therefore it isn’t difficult to realize assets regardless of the situation on the market. The process of buying/selling takes minimal time, so much so that it can be counted in seconds. Meaning that investors can register their trading result in minimal periods.

A key feature of ETF is the market differentiation between primary and secondary. In the first case, only authorized participants are able to access these trading platforms. On this level, assets are released as well as liquidated. Mutual funds are, rightly so, comprised of 50 thousand assets or more as standard in any one operation. Secondary market access is widely accessible, without any signatures necessary. All trading operations follow a similar pattern that exists on the asset and securities market. The average internet user doesn’t have access to the primary level, however, they can access the secondary market, thus allowing them to trade any collection of assets with minimal investment.

The nuances of managing ETF on the Russian market

Exchange traded funds don’t differ wildly on the Russian market. On the legislative level, clear regulation was only passed for this new kind of financial operation in 2020. Then on par with mutual funds, a new type of investment fund was added, which has several differences from the latter, however, not so fundamental as to force a separation into a separate category. Only one company in the Russian Federation offers this type of exchange contract, FinEx. Its actions are regulated by the Russian laws governing the securities market. The company received its license from the Central Bank of Russia and holds the status of an official market participant.

The National Bank of Ireland fulfills the task of regulating the trading process. Foreign corporations could gain access to the Russian market due to the intermediaries and a large number of market makers. Currently, the Moscow Exchange offer anyone who desires the opportunity to invest in ETFs issued by various countries, including European, Asian, as well as American.
How do you profit from ETF?

In Russia, ETF trading is conducted through the Moscow Exchange. Anyone who wishes has access, as the market is opened to all individuals. First and foremost, you need to open a special trading account with a bank or a broker. Following this, you need to make a deposit with a broker. You also need to sign the agreement. The specific procedure for opening a trading account varies depending on the platform or broker. For example, you can register on the Moscow Exchange online.

After that, you will gain access to the QUIK trading platform, created with the aim of making it easier to access the exchange. Through this application, you can easily apply to purchase the fund share you’re interested in, in your desired quantity. The system was built for professionals, however, even for beginners, it isn’t difficult to grasp how it works.

In terms of the technical aspects of trading, you couldn’t call it hard, it only appears so at first glance. The most difficult part for investors is conducting the necessary market analysis and selecting the most lucrative assets. Currently, on the Moscow Exchange, there is a list of authorized exchange-traded funds. The list is extensive, including more than 1,500 items. There are details available on every tool, from its type, direction of investment, profitability, current exchange price, as well as further information.

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ETF Trading Strategies for Any Investor

You may have heard of ETFs or SPXs and some of you even have them in your portfolios, but not many investors are aware of the diverse ETF trading strategies these assets have to offer. However, after reading the ETF trading strategies listed below, you will be that much more of a savvy trader and have more weapons in your investing arsenal.

Invest in the Market with ETFs

Like an index, you can use ETFs to invest in the stock market or even play market volatility. There are ETFs for the NASDAQ like the QQQQ’s. There are ETFs for the S&P like the many SPDRs. There is a Dow Jones ETF (DIA). And for those who want to trade market vol, there are quite a few ETFs and ETNs that track the CBOE Volatility Index (VIX)

And you don’t have to stop with those markets, there are many more markets just waiting for buyers and sellers, and there are just as many market ETFs that track them

Use ETFs to Gain Exposure to an Industry

Maybe you don’t want to invest in a market as much as a particular industry. Do you think producing clean coal is the next “green” advancement? Maybe a coal mining ETF is the way to go. Whether it’s financials, defense, or even technology, it’s much easier to buy an industry ETF than trying to corner the market in sector equities.

Invest in Commodities without Investing in Commodities

Let’s face it; you don’t have room in your basement for a barrel of oil, a chest of gold, and some cattle (or maybe you do). However, you do have room in your portfolio for commodity ETFs. Without stocking up on livestock, you can purchase a commodity ETF and have instant exposure to the commodity market. It’s a much easier transaction, and you don’t have to water it

Foreign ETFs Give You Access to International Markets

Foreign investing can get complicated. Currency adjustments, foreign tax laws, and just general overseas challenges. However, there are ETFs that make international investing much easier. Foreign market ETFs, funds that are domestic currency-based, emerging market ETFs, broad foreign funds, and even ETFs that track individual countries like Brazil and China. There’s no longer any reason to fear investing outside the U.S. or any country. The world is your ETF

Bond ETFs are the Gift that Keeps Giving

Bonds ETFs are a little more enticing than most investments because they not only trade on secondary markets, but they can also create a revenue stream in your portfolio.

Bond investing, in general, can be difficult. Coupon rates, default risk, duration. However, a bond ETF can alleviate some of that complexity by giving investors one pre-packaged asset that gives instant access to the bond market

There are variations of ETFs known as ETN’s; exchange traded notes. ETNs are assets issued by a major bank as senior debt notes – unlike ETFs which consist of securities such as commodities, currencies, futures, forwards, and options.

When you buy an ETN, you buy a debt asset similar to a bond, but the terms of the debt contract are determined by the structure of the note. ETNs are backed by a bank with a high credit rating, so they are pretty secure products. However, ETNs are not without credit risk, just a lower level

Play the Currency Market With ETFs

Bond ETFs and ETNs are two ways to play the interest rate market, but when it comes to foreign interest rate trading, look no further than currency ETFs. Whether you want to invest in a broad currency asset, a regional currency like Europe, or even an individual country currency, ETFs have got you covered…literally. Currency ETFs are a great way to hedge foreign risk, play foreign interest rates, or just invest in foreign currencies.

Playing ETFs on the Downside

For every buy trade, there’s a sell trade on the other side. Most people associate investing with buying, but that only covers 50% of every trade. So it makes sense that there are ETFs specifically created for bearish investors.

Creating downside is possible by selling any ETF, but what if I told you that you can buy an ETF and still get short. It’s true, and it’s called an inverse ETF. Perfect for investors who have restrictions against selling, but want to get short; they can buy an inverse ETF

Hedging Risk with ETFs

Again we come back to “investing means buying.” But a big part of investing is also protecting against risk. That’s where ETFs can help. Do you have a large diversified portfolio that wins when the market rises? Protect downside by selling a market ETF. Short a lot of oil stocks? Buy an oil ETF to protect your upside exposure. Long an index? Protect your position by selling an underlying ETF.

Hedge Indexes with ETFs

I alluded to this above, but ETFs are a great way to protect index positions. If you’re long a particular index, you can make an opposing trade to protect your risk. Some indexes have multiple ETFs that track it, so the opportunities can be plentiful when it comes to hedging your index risk. Trade an ETF to protect some or all of your index position or in some cases put on a similar index position by using an ETF instead. After all, that’s why they were created.

Explore Your Options with ETF Options

There are many ways to utilize ETF options. You can use them to hedge ETFs (and vice versa) or even the correlating index. ETF calls can be great assets to gain upside exposure without tying up a lot of money, and puts are a way to get short as well. You can even use advanced ETF option strategies to take a volatility position or just trade for market value. If there’s an ETF that lists options, then you have…options.

Play Earnings Season with ETFs

At least four times a year, you’re going to have to prepare for earnings season. ETFs can help with that game plan. Whether you use ETFs to get long a promising sector, protect against any earnings surprises, or play earnings volatility with ETF option straddles, there’s an earnings strategy for you. If you have earnings announcements looming on your securities, ‘​tis the earnings season for ETFs.​

Trade ETFs That Fit Your Investing Style

Do you tend to favor large-cap securities? Do you like to invest in value stocks? Either way, there’s an ETF for you. Be it growth, value or blend, or even large, mid, or small-cap, there’s an ETF to fit your strategy. It’s important to be comfortable with your portfolio, and style ETFs are just the asset to fit your investing style.

There are many investors who are new to ETFs, so this is a perfect way to see if any of these 14 ETF trading strategies can be a fit for a portfolio. No asset is going to be perfect. However, there’s a very strong case to be made for including exchange traded funds in your investment strategy and not a lot of reasons not to.

Guide to ETFs: Understanding exchange traded funds

29 Oct 2020 | 5 min. read

Find out how exchange traded funds (ETFs) work and what you should know if you are thinking of investing in one.

Key takeaways

    ETFs are investment funds listed and traded on a stock exchange. Many aim to track the returns of a stock or commodity index. Many ETFs listed on SGX are complex structures involving the use of derivatives. Such ETFs are classified as Specified Investment Products

What it is

Exchange traded funds (ETFs) are investment funds that are listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETF’s stated investment objective.

How it works

An ETF typically aims to produce a return that tracks or replicates a specific index such as a stock index or commodity index.

Such index tracking ETFs are passively managed by ETF managers and do not try to outperform the underlying index. Index tracking ETFs have fees and charges that are usually lower than those of actively managed investment funds.

ETFs may have complex structures. They may be structured as cash-based ETFs or as synthetic ETFs, which involve the use of derivatives.

Note: Many ETFs have been categorised as Specified Investment Products (SIPs). You will need to meet certain requirements to invest in them. Check with your financial institution whether the product you are considering is an SIP.

Returns of ETFs

You invest in an ETF by buying units in the ETF. There is capital gain when the price of the units rises above the price paid for them. Some ETFs also pay dividends.

What’s the most you can lose?

ETFs are not principal-guaranteed. You may lose all or a substantial amount of the money you invested in certain situations. The risks of investing in ETFs are described in the prospectus and product highlights sheet.

Why invest in ETFs?

There are many ETFs to choose from. If you buy an ETF which tracks a stock index, you gain exposure to the performance of the index. For example, investing in an ETF that tracks the Straits Times Index (STI) provides investors with exposure to the Singapore market.

Here are a few advantages of investing in an ETF:

  • You can gain exposure to an index without having to invest in all its component stocks.
  • Fees and charges tend to be lower than for actively managed investment funds, as ETFs have lower management fees. There is also usually no sales charge, although if you buy and sell ETFs on the SGX, you would need to pay the applicable brokerage commissions or transfer taxes.
  • As ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day

Checklist

Are ETFs suitable for you?

Investing in ETFs may not be for everyone. Before you invest, make sure that you:

  • Want potentially higher returns BUT are also prepared for variable returns which include the risk of losing all or a substantial part of your investment.
  • Understand how returns are calculated and the factors that can affect returns.
  • Understand the risks associated with the ETF.
  • You should be aware of the risks associated with the use of derivatives by ETFs, including the consequences if the provider or counterparty of the derivative defaults.
  • Are prepared to have your money tied up for long periods of time.
  • A longer time horizon is generally preferred to ride out short-term price fluctuations. But depending on the investor’s investment objective, some ETFs may be suitable for short term trading.
  • Are familiar with the ETF manager and the ETF’s track record.

What are the risks?

Common risks associated with ETFs include the following

Market risk

  • You are exposed to market risk or the volatility of the specific benchmark tracked.
  • For example, the performance of an ETF tracking the Straits Times Index (STI) will be directly affected by the price fluctuations of the component stocks of the STI.

Tracking error

  • Changes in an ETF’s NAV may not exactly correspond to price changes of the index
  • In cash-based ETFs, the manager may not be able to buy or sell the component stocks in their exact proportion, or to keep up with market or weighting changes.
  • Execution costs, investment constraints, or timing differences may also add to tracking error.

Foreign exchange risks

  • You are exposed to foreign exchange risk if you buy an ETF whose base currency is different from your own.
  • Some ETFs may trade in a currency that is different from that of the underlying assets.

Liquidity risk

  • Designated market makers provide liquidity in ETFs by providing continuous bid-ask prices throughout the trading day.
  • If the market maker fails to perform its duty, liquidity may disappear, making it difficult for you to sell your ETF units.

ETF’s traded price not reflective of NAV per unit

  • An ETF’s traded price may not reflect its NAV as the traded price is subject to market demand and supply.

Risks from securities lending

  • Assets held in cash-based structures may be used for securities lending.
  • You are exposed to the risk that the borrower of the securities defaults and does not return the securities.

Types of ETFs: Cash-based vs. synthetic

There are different ways to structure an ETF even if its investment objective is to track the same underlying index.

Cash-based ETF

Cash-based (or physical) ETFs are ETFs that invest directly into the assets that make up the index. They may invest in:

  • All of the index’s component stocks, bonds or assets.
  • A representative selection of the index’s component stocks, bonds or assets.

Synthetic ETF

Synthetic ETFs are ETFs that use derivative products such as swaps or access products (for example, participatory notes) to produce returns that track the relevant indices.

The use of derivatives means:

  • More parties are involved, e.g. the swap counterparty or the access product issuer.
  • You are exposed to the risk that the swap counterparty or access product issuer defaults on its payment obligations under the swap or access product. Such a party may default if it becomes bankrupt or insolvent. The amount of loss you suffer will depend on the ETF’s exposure to the counterparty or issuer.

Synthetic ETFs that are swap-based may use either the unfunded or funded structure.

On the SGX, synthetic ETFs are tagged with an ‘X’, which appears next to the ‘@’ used to mark SIPs. You’ll see the symbols [email protected] beside the ETF’s trading name.

Fees and charges

Find out about transaction charges like brokerage charges and clearing fees from your financial adviser or broker. There are usually no sales charges for ETFs.

Certain charges are payable by all ETFs. These include fees that the fund manager, trustee and other parties charge to the ETF. Although these fees are paid by the ETF and not by the investor, they will affect your returns.

Checklist

Key questions to ask before buying

ETFs differ in terms of complexity, investment objectives, strategies, risks and costs. When choosing an ETF, consider the following:

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