How to Trade ETFs

Exchange traded funds (ETFs) are similar in a lot of ways to mutual funds, but they are actually traded in a more similar way to equities. They are mainly a basket made up of different securities which are traded similarly to how normal stocks are on an exchange. Most of the time ETFs will track some sort of underlying index. It is similar to a mutual fund in the way that it’s similar to a mini-portfolio. In this article we will cover all the basics of trading ETFs.

  • Learning about ETFs
  • How to trade ETFs
  • Key factors to consider
  • Mistakes to avoid
ETF Highlights

How to trade ETFs

ETFs are a quick and easy way for an investor can get involved in the market without having to make too many decisions themselves. Once they have decided what ETF they want to invest with, the rest is out of their hands until they decide to sell their position in a given ETF. To learn how to trade ETFs, you need some basic information to start off with. This basket of securities will normally focus on a given industry, class of asset or some other type of category. They are ideal for quickly creating a portfolio that is diversified or of more short term traders they can be used to take advantage of price movements.

etf 1

As ETFs are similar to stocks in so far as they are traded on exchanges, you have the ability to short a lot of them, once you have the right type of account with your broker. This means that you can bet on a falling price movement of a given ETF even if you don’t own a position in it. This is of course a risky move and could be massively damaging if it doesn’t pay off. The main difference between mutual funds and ETFs is that there is intraday trading with ETFs. Mutual funds will settle on a single price when the trading day has been completed, which is called net asset value (NAV). ETFs will be traded during the day on exchanges which means that their price if going to fluctuate depending on the supply and demands of the market, similar to stocks.

Top 3 ETF Broker Comparison

1
of 6 ETF Broker Charles Stanley Direct
ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 50
Trading from 11,50 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 6 ETF Broker AJ Bell Youinvest
ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 0.00
Trading from 1,50 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.

Key factors to consider when learning how to trade ETFs starting with market liquidity

Liquidity: There is a lot of money and activity in the ETF market, with some of the leading funds being extremely popular with investors. This means that you are going to find it a lot easier when trying to make a trade when it comes to the more popular ETFs. There are some funds that are more niched in nature which will be markets that are a bit more illiquid.

Choices: There are a staggering amount of ETFs for you to choose from covering a wide array of asset classes, including bonds and equities. You will be able to boil down the ETFs depending on the likes of its geographic area, style of investment, a commodity, sector etc. Every day there are new ETFs being introduced into the market which come with innovative new approaches and ideas.

Diversity: One way in which traders utilise ETFs is to get involved in the market that they wouldn’t normally invest in. This is thanks to there being baskets of stocks rather than having to purchase individual stocks which of course won’t be diversified like a usual portfolio will

What is the approach that retail ETF traders should take when learning how to buy ETF shares?

When are discussing the trading of ETFs and how to buy ETF shares, there are two types of trades you are going to be dealing with. If you are a retail investor and you will be making relatively small purchases, you will be trading ETFs in a similar fashion to normal stock trading. You will be able to see the bid/ask offers through your given trading platform which is the market you will be facing. For those who will be doing some more significant trading, it is a different process. This article presumes that you are going to be a retail trader who will not be dealing with institution-sized money with your ETF trading.

On the most basic level when learning how to buy an ETF, you will be dealing with market orders. While they are the simplest way of placing ETF trades, they are also one of the most risky ways of trading ETFs. When you go to place your market order, this gives instructions to your broker that you want this ETF traded immediately, no matter what price it may be. For example, if the current market offering for your chosen ETF is £59.90 for the bid and £60.10 for the ask and you are looking to make a purchase 100 shares, it is likely that your order will be filled at the £60.10 point.

Making Trades Bigger than 100 Shares

If you are going to be making trades that are bigger than 100 shares in size, there is not a guarantee in place that the market order will be executed on the spread that is currently publicly available. The spread that you are seeing through your trading platform is simply what the best bid and offer is at that moment in time, but it may just be for 100 shares. If you are looking to purchase 1,000 shares or more, you will easily bypass this and your order is going to be filled at a much greater costs than the figure which you have seen on the broker platform.

There is also a lot of ETFs that have wide spreads advertised starting off with. For those ETFs which are less liquid, there could be a spread of at least 10%, which is a massive price to pay. When dealing with market orders, this is what you will be facing. You can get a more attractive price when using a straightforward limit order. Finally, there can be significant swings in the market between the time you have placed your market order and by the time it gets executed. As a general rule of thumb, you are best off using market order for the most liquid and biggest ETFs where you will be pretty much guaranteed to have instant execution. Otherwise, you should avoid using them as part of your trading.

Using limit orders

The next step up from using a market order is that of the limit order. The limit order is you the trader telling your broker what the max price you are happy to pay when trading a given ETF will be, or when you are selling, what the lowest price you are willing to take. This means that you will give yourself protection against terribly poor executions. Of course, on the other hand, if the market begins to turn away from the direction of your order, this order won’t get filled. Traders utilise limit orders when trying to get an execution that lies in between the given spread. If you are patient, you will likely get your order filled very close to the bid price, giving you significant savings when dealing with significant quantities of shares, as well as through the long term. You are therefore much better off using a limit order as opposed to a market order in most scenarios.

The final option that is used when trading ETFs is usually reserved for traders dealing with significantly large trades. They can do business with liquidity providers. These are institutional-type market makers that have the aim of facilitating the buying and selling process of ETFs for traders. They effectively are facilitators for the ETF market.

guide etf 1

Having a strategy for trading ETFs

Just like with all trading types, you need to have a comprehensive strategy in place that has been tried and tested over a significant space of time. You can then place your trust in the plan while still tweaking it along the way according to the experiences you have when trading ETFs. Often times the types of analysis traders use will be either fundamental or technical analysis. Technical analysis relies more on charts and statistics resulting from the activity of the market, including variables such as volume and previous prices.

Fundamental analysis relies more on looking at significant economic events, such as the release of data from central banks, financial reports for companies and global events that affect the market. A lot of traders will use a combination of these two approaches in order to come to a conclusion about a given trade. The type of strategy you use depends on what type of ETF you are focusing on. If you are focusing on a specific corporate bond ETF for example, you will mostly be using fundamental research, looking at the earnings for the company, as well as their credit rating and looking at the economic outlook for the given industry.

Analysing ETFs

If you are analysing an ETF which tracks a major stock index, this will lead to a more emphasis on technical analysis, while still looking at the role the index plays in the overall scheme of things and how certain changes in the economy could affect the fortunes of the ETF performance.

Overall, ETFs are great for traders because of the significant liquidity, low expense ratios, large choice and low investment entry. Dollar cost averaging is a popular strategy for ETF trading. This is when you invest the same dollar amount on scheduled intervals no matter what the price of the ETF may be. This is easy to do because it doesn’t require any research or effort past the initial vetting process of the ETF. It is a common way in which young people save their money and as you are investing consistently every month, the price you pay for the given ETF will average out over time. A lot of people use ETF trading to work on their asset allocation depending on the mood of the market. For example, if there is high volatility they will favour lower volatility ETFs that focus on stocks which do not have much volatility, as well as those holding significant amounts of bonds and cash etc.

Swing Trading

Swing trading is used in order to take advantage of significant price swings in the price of a stock or other security. This could have a time interval of anywhere from a few days to a few months ETFs are an ideal choice for swing trading because they have narrow bid/ask spreads as well as being easily diversified.

ETFs are an easy way in which you can short a specific sector or region. While betting against the success of a company, industry etc. is risky and there is a lot of downside, this tool is commonly used by ETF traders when they believe that a given market is going to decline. A lot of ETF traders use the market in order to bet on the likes of seasonal trends. Certain markets tend to work in trends depending on the time of year. Traders will invest in an ETF before the trend begins and ride it out for a while as the price hopefully increases and the can close out this position before the seasonal trend ends. This would be much harder to do with individual stocks because of trading costs and lack of diversification if only dealing with a few equities.

1
of 21 Forex Broker Cityindex
Currency pairs 84 Currencies
Max. Lever 1:30
Trading size Mini-Lot
Minimum deposit € 100
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 21 Forex Broker Pepperstone
Currency pairs 70 Currencies
Max. Lever 1:30
Trading size Mini-Lot
Minimum deposit $ 200
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 21 Forex Broker Markets.com
Currency pairs 50 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 21 Forex Broker AvaTrade
Currency pairs 47 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 21 Forex Broker Plus500
Currency pairs 61 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 100
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CFD Service. 80.6% lose money
1
of 6 ETF Broker Charles Stanley Direct
ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 50
Trading from 11,50 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 6 ETF Broker AJ Bell Youinvest
ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 0.00
Trading from 1,50 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 6 ETF Broker Bestinvest
ETFs w/ discount 216
Custody fee 0.4% annually
Min. deposit £ 500
Trading from 0 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 6 ETF Broker DEGIRO
ETFs w/ discount 740
Custody fee 0 GBP
Min. deposit £ 0
Trading from 1,75 GBP + 0,004%
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 10 Stock Broker Charles Stanley Direct
National fees £ 11,50
Custody fee 0,25%
Intl. fees £ 11,50
Dep. Protection 50,000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 10 Stock Broker Fidelity
National fees £ 10,00
Custody fee 0,35%
Intl. fees £ 10,00
Dep. Protection 50,000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 10 Stock Broker Bestinvest Brokerage
National fees £ 7,50
Custody fee 0,4%
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Dep. Protection 50,000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
4
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Custody fee £ 0,00
Intl. fees 0,50 € + 0,004%
Dep. Protection 20,000 €
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 10 Stock Broker IG Stock
National fees £ 8,00
Custody fee £ 8,00
Intl. fees 10 EUR
Dep. Protection 50,000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 20 CFD Broker Markets.com
FTSE spread 1.5 Points
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit £ 100
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 20 CFD Broker AvaTrade
FTSE spread 1.5 Points
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Max. Lever 1:30
Min. deposit € 250
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Risk warning: Capital can be lost. Terms and conditions apply.
3
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FTSE spread 1 Point
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Risk warning: Capital can be lost. Terms and conditions apply.
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of 20 CFD Broker Plus500
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CFD Service. 80.6% lose money
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Risk warning: Capital can be lost. Terms and conditions apply.
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Risk warning: Capital can be lost. Terms and conditions apply.
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Risk warning: Capital can be lost. Terms and conditions apply.

Conclusion:

How and Why to Trade ETFs

Finally, ETFs are a useful way for traders to hedge their positions. There is such variety and choice available in the ETF market that it is not hard in most cases to find a suitable ETF which will help a trader to hedge another position they may have open.

As you can see, the ETF market is very popular for both beginners and experienced traders alike. There is so much flexibility and many great options for you to make profitable investments that it is an appropriate place to trade. It is easy to diversify and have liquidity in the majority of cases.

It is important that you continually develop your skills and expertise across a variety of ETF trading strategies and ensure that you learn from both your successes and failures when trading the market.  If you do so, you can certainly have a profitable experience trading ETFs.

ETF Highlights