ETF considered as Derivatives?

[Mary S]

Hi, explain to me about this question, please.

[Danitah J]

Hello Mary,

Financial instruments that get their performance from an underlying asset are known as derivatives. Exchange-traded funds are not derivatives; however, there are exemptions of them that are derivatives.

 Examples of exchange-traded funds that employ derivatives are such as short ETFs and particular leveraged ETFs. Inverse ETFs display the opposite of the essential asset. Leveraged ETFs aim at providing a lot of profit than the underlying asset.

For example, stock options base their value from the share prices of a public company; hence, it is derivative security. Their value is not as exact as the shares, but it is closely related to it. Other derivatives include options, futures, swaps, and forwards.

Mostly, derivatives are traded on contracts and not on an exchange. The trading of results depends on the changes in the price of the underlying asset.

Many investors are trading with financial tools that do not deal in derivatives since they consider them as complex. They also say that the risks associated with the derivative-based instruments are many.