Financial Resource

Exchange Traded Funds and Financial Spread Betting

Combining Financial Spread Betting with ETFs can give you a way to get exposure to an ever growing range of sectors, commodities, global financial indices which you can profit from regardless of markets moving up or down. An as an added bonus UK taxpayers can make tax free gains.

Exchange traded funds, or ETFs, have been around since 1993. ETFs are index tracking funds which can be traded on a stock exchange, just like a share.

A typical ETF might seek to mirror the performance of an index like the S&P 500 or the FTSE 100, or perhaps a single sector such as the S&P Energy Sector (XLE) or commodity price such as Gold (GLD).

ETFs have been growing in popularity with investors both large and small, partly because they can be easily traded, just like any other listed security, and partly because they are much cheaper in terms of the fees they charge compared with conventional mutual funds or unit trusts.

So why would you place a financial spread bet on a ETFs? Surely, if you are convinced of the merits of ETFs, it would be easy just to buy and sell the physical ETF rather than opening a spread betting or contracts for difference (CFD) account to trade them?

ETFs are offered as spread bets for a number of reasons, many of which really boil down to the advantages of financial spread betting. For starters, when opening a spread betting account, you gain the advantage of trading on margin: your spread betting company will loan you the majority of the value of the trade, while you only need to deposit a relatively small percentage as your margin. This is something you could not do with a physical trade on an ETF. It also means you are effectively trading a larger amount of shares in that ETF than you would ordinarily be able to do, and if you are right, and the ETF’s price goes up, you get to keep all the profit from the trade. Of course, if you are wrong, the losses could be proportionately great, so caution should be used when trading these products.

ETFs are easily available via a conventional stock broking or share dealing account. But like trading physical shares, if you trade physical ETFs, you are liable to a commission fee every time you trade. In addition, you may also have to pay custody fees. With financial spread betting or CFD trading, you don’t face the drag these costs can pose to your trading account. Plus, you are able to trade other assets, like currencies or commodities, using the same account – not something that is usually possible with a share dealing account.

Financial spread betting also lets you short an ETF. This means you can potentially profit if the price of that ETF falls, by using the bid or sell price. This is much harder to do in the physical market. Yes, some providers do list inverse ETFs, that is, funds which move in the opposite direction to the index. But these are generally only available for the more high profile indexes, like the S&P 500 for example. It is much easier to short an ETF using a financial spread betting or CFD account.

Finally, you may own the physical ETF and may want to hedge your risk by buying a bit of insurance against the possibility that ETF may fall in value. You can do this using a spread betting account by opening a short trade. You must make sure you have a stop loss in place (an automatic order that will close the trade at a pre-arranged price if it moves against you), because otherwise your hedge order will eat into any profits you are making in the physical market. This can be a good tool to protect yourself against sudden market moves.

The universe of ETFs is expanding all the time as they increase in popularity. There is already a significant number of ETFs available for spread betting. These include many of the major commodities markets, where there are ETFs tracking the likes of gold, crude oil, cotton, corn, natural gas and sugar. ETFs tracking a basket of commodities (also known as Exchange Traded Commodities), like agricultural commodities or base metals, are also available to trade.

ETFs are a good way to access sector-specific indexes, for example covering financial services, utilities, real estate or oil services. They can also be used to trade some emerging markets stock markets, like Brazil, China, Russia, or even Taiwan.

ETFs are able to replicate an index through a variety of means. They are not always suitable for holding in a portfolio over the long term horizon. This is because they are subject to something called tracking error, where the very activity of buying and selling shares or derivatives to replicate the index the ETF is trying to track, as well as charging fees, means the ETF does start to deviate from the index over time. Tracking error will vary from ETF to ETF, and from market to market. This is more of a problem for those using ETFs to hold as part of a long term investment strategy, but they are ideal for financial spread betting, particularly if you measure the life of a trade in days or weeks.

Remember, with financial spread betting and CFD accounts, you do not own the ETF: you are simply seeking to profit from changes in the price of that ETF.

To learn more about Financial Spread Betting please go to www.fintrader.net

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