Because of its significant growth in popularity over the past several years, exchange-traded funds (ETFs) has become an investment buzzword among investors due to its straightforward way of delivering exposure to a wide spectrum of financial assets such as stocks, commodities, bonds and even real estate.
In this section, we've put together a guide that will help you become familiar with ETFs, including all its basic methodology and how you can invest on them using the eToro trading platform.
|💰 Minimum Investment||$10|
|🏭 Types||Stock Index ETFs, Sector or Industry ETFs, Style ETFs, Bond ETFs, Commodity ETFs, Real Estate ETFs, Leveraged ETFs, Inverse ETFs|
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77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
What is an ETF?
ETF or otherwise known as exchange-traded fund is an investment concept formulated by Leland O'Brien, an American Investment Firm, and Rubinstein in 1990. The group found a way to put together a collection of stocks into a single cluster before trading it on a stock exchange as one entity.
ETF is an investment fund that charts the market performance of a specific asset, industry sector and stock market index.
Simply said: ETFs and Mutual Funds are almost alike except that ETFs can be traded on the stock market the same way a trader can trade ordinary stocks.
Examples of Popular ETFs
The first ETF compiled was the SPDR S&P 500 ETF (SPY). This ETF tracks the popular S&P 500 Index, which is the stock market index of the 500 big American companies. It remains as one of the widely-followed ETFs in the market today.
Other popular ETFs are:
- SDPR Dow Jones Industrial Average (DIA): Tracks the stocks of the Dow Jones Industrial Average
- iShares Russell 2000 (IWM): This ETF tracks the Russell 2000 small-cap index
- Invesco QQQ (QQQ): This ETF tracks the Nasdaq 100 Index, which is a cluster of technology stocks
- iShares FTSE 100 UCITS ETF (ISF.L): This ETF tracks the 100 largest companies by market capitalization listed on the London Stocks Exchange.
- iShares Nikkei 225 ETF: This ETF is the stock market index for the Tokyo Stock Exchange and tracks the 225 largest publicly-owned Japanese companies.
- OIH: ETF of oil companies
- XLE: ETF of energy companies
- XLRE: ETF of real investment trusts
- BBH: ETF of biotechnology companies
- SPDR Gold ETF (GLF): tracks the performance of the Gold commodity
- Technology Select Sector SPDF ETF (XLK): provides exposure to technology companies in the United States.
Advantages of Trading ETFs
Trading ETFs has their own pros and cons. First, learn more about its advantages.
- Trading ETFs are cheap: ETFs charges low fees since they don't require investment managers to manage it unlike with mutual funds.
- ETFs can easily diversify portfolios: Just by investing on a lone ETF, you can gain exposure to hundreds of stocks just like with the S&P 500, which can potentially give you exposure to the stocks of the biggest American companies.
- Transparency: Unlike with mutual funds, you can easily see what stocks are inside an ETF cluster.
- Access to world markets: With ETFs, a trader can easily access to foreign markets, real estate markets, commodity markets and more. For example, if you're interested in Chinese stocks, you can easily look into the iShares China Large-Cap ETF or the FXI for some exposure to the Chinese market.
- ETFs can be traded easily: Since ETFs are traded on the stock market, any trader can easily buy or trade it.
- Other pros of investing on ETFs are: Tax-efficiency and automatically reinvested dividends.
Cons of Trading ETFs
With all its benefits and advantages, ETF trading also comes with few disadvantages. These include:
- Its more expensive than buying stocks: While trading ETFs is cheaper than mutual funds, it still incurs additional cost compared to investing on stocks.
- Can produce low dividend yields: When compared to a high-yielding individual stock, the dividend from an ETF may not be as big.
- Long-term leveraged ETFs can present risk: If you invest on ETF with a leverage of double or triple, you run the risk of magnifying your losses if the market moves in a not so favorable direction.
Types of ETFs
Here are the types of ETFs you need to familiarize yourself:
- Stock index ETFs: These kinds of ETFs track a specific stock market index like the Nikkei 225, the FTSE 100 which the iShares FTSE 100 UCITS ETF (ISF.L) tracks. Investing on this type of ETF is a wise way to gain a wide exposure to the stock market.
- Industry or Sector ETFs: These ETFs provides exposure to a specific industry. For example, the Healthcare Select Sector SPDR ETF (XLV) tracks the healthcare stocks belonging in the S&P 500 Index
- Style ETFs: An example of this is the iShares Edge MSCI USA Quality Factor ETF (QUAL) which tracks mid-and large-cap stocks in the United States.
- Commodity ETFs: An example of this is the SPDR Gold ETF (GLD) which tracks the gold's performance in the market.
- Bond ETFs: An example of this is the iShares Barclays 1-3 Year Treasury Bond ETF (SHY), which tracks and gives exposure to the United States Treasury Bonds.
- Other types of ETFs are: Real Estate ETFs, Inverse ETFs and the Leveraged ETFs.
CFD Trading ETFs on eToro
One way of easily investing on ETFs is through an online brokerage such as eToro. You can SELL an ETF position by CFD trading or Contracts for Difference trading. CFDs are financial instruments that provides investors and traders the chance to earn from the movements of an asset's price without needing to own a physical asset or the underlying security.
For example, if you think the FTSE 100 index will drop in the next few months, you can open a SELL position of iShares FTSE 100 UCITS ETF (ISF.L). If the FTSE 100 index drops in value, you stand to profit from your short position. However, if it rose in value, you end up with a loss.
Opportunities From Trading ETFs
Many investors like the simplicity of trading ETFs. Here's why:
If a trader foresees a specific index tracked by a particular ETF is bound to rise in the coming months, they can profit on it by opening a BUY position on the ETF. This action is referred to as "going long". If the index represented by the ETF you opened a "Buy" position with, increased its value, then you can profit from it when you close the trade. Otherwise, if it falls, the ETFs value falls as well, and so is your investment causing you to suffer a loss.
What Fees Are Involved With ETFs?
There are two fees related to trading ETFs. These are the following:
- Ongoing Charges: These are fees charged by an ETF provider or a fund company. This fee is relatively very low. For example, the latest "Ongoing Charges" for the SPDR S&P 500 ETF (SPY) is only 0.095%.
- Trading Commissions: Most investment platforms and brokerages charge a trading commission fee. However, on eToro, there are ZERO commissions when opening and closing ETF positions.
Factors to Consider When Investing on ETFs
- Wide Exposure: Starting out with an international fund that invests in stocks across several countries may be a good idea for ETF beginners since this is a great way of diversifying and spreading risks.
- Cheaper or Zero fees: To prevent adding to your expense ratio, choose ETFs that don't have commission fees.
- Consistent Growth: Investors who are new to ETFs may end up trading impulsively. When such instances occur, it is wise to remember to just want to “buy-and-hold” ETFs for the meantime. These are ETFs designed for sustainability and stability without sacrificing growth too much.
How to Trade ETFs on eToro?
- On your eToro dashboard, click "Discover".
- Select "ETFs".
- Select the ETF asset of your choice. In this example, we will choose SPDR S&P 500 ETF.
- Click "Buy" and set the amount you want to invest.
- "Click "Open Trade".
Frequently Asked Questions (FAQ)
Does eToro offer commission-free ETF trading?
Yes, eToro's ETF trading feature allows clients of eToro (Europe) Ltd., eToro (UK) Ltd. and eToro AUS Capital Limited to invest in ETFs with zero commission fees. It's important to note, however, that this offer is only applicable to regular trades and not for short or leveraged trades. Furthermore, this promotion is exclusive to eToro clients and may be subject to changes or restrictions depending on the region where the client is based.
Can I trade ETFs on eToro's mobile app?
Yes, you can trade ETFs on eToro's mobile app as well as access your investment portfolio and view real-time market data. Most of the activities and actions that can be done on the web-based platform can also be done using the app.
Can I set up automatic ETF investments on eToro?
No, eToro doesn't have automated trading systems on their platform and it doesn't permit using third-party automated tools. However, the platform provides a range of risk management tools, including stop loss and take profit orders, that you can use to manage your ETF trades. eToro also offers the CopyTrader feature, which allows you to follow the trades of experienced ETF traders on the platform.
Can I invest in ETFs on eToro's demo account?
Yes, you'll be able to invest in ETFs via eToro's demo account but you need to be aware that this will only be in virtual mode so any profits or losses are not real. The demo account allows you to practice trading with virtual money, without risking your real capital. It provides access to all the features of the eToro platform, including ETF trading, in a simulated environment that mimics the live trading experience.
Can I invest in sector-specific ETFs on eToro?
Yes, you can invest in sector-specific ETFs on eToro. This broker has a broad range of ETFs, including those that focus on specific sectors such as technology, healthcare, energy, and more.
Can I invest in commodity ETFs on eToro?
Yes, eToro's platform offers a number of commodity ETFs. SPDR Gold Trust (GLD), United States Oil Fund (USO), Invesco DB Oil Fund (DBO), Teucrium Wheat Fund (WEAT), and iShares silver trust (SLV) are just some of the ETF assets that they offer under this sector.
Does eToro offer any ETF-specific trading signals or alerts?
Yes, on eToro's platform, you have the option to receive ETF-related signals from experienced traders. These signals are notifications that highlight potential opportunities to buy or sell specific ETFs based on the traders' analysis and research. Additionally, you can set price alerts for ETF assets that interest you, which will notify you when the price of the asset reaches a certain level. However, it's important to keep in mind that price alerts are provided for informational purposes only and should not be relied on as the sole basis of your trading decisions.
How do I withdraw my ETF investments from eToro?
When you want to withdraw your ETF investments from eToro, you must first close your open ETF position. To do this, you can navigate to your portfolio, select the ETF investment you wish to close, and click on the "Close" button. Any profits or losses will be reflected in your eToro account balance. To withdraw the funds, you can click on the "Withdraw Funds" option in the left-hand side menu of the platform. This will take you to a page where you can select the withdrawal method that best suits your needs.
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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision.
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.