What are Exchange Traded Funds (ETFs)

ETFs are passively managed investment funds traded publicly on stock exchanges in the same manner as traditional Shares. An increasingly popular product, ETFs combine the benefits and ease of investing in Shares with the advantages of mutual fund investing and ready-made diversification of index tracking.

Each ETF tracks an index or benchmark, meaning the objective for an ETF is to replicate the performance of the index or benchmark that it is tracking. ETFs track specific Shares, Bonds, Commodities or Currency Indices, some of which have a regional focus, while others have a sector focus, thus making them ideal for diversifying portfolios.

Geared towards Investors and Traders who feel they do not have the time to manage a share portfolio or insufficient capital to achieve a large enough spread of stocks or the right stock-picking skills have the option of investing in third-party vehicles such as unit trusts or Exchange Traded Funds (ETFs).

ETFs are publicly listed investment funds that trade on a stock exchange in the same manner as ordinary stocks. ETFs combine the benefits of traditional stock trading, such as intraday pricing and accessibility, with the advantages of fund investments, such as ready-made diversification.

Even though a great variety of ETFs exist, a number of common features can be found in ETFs. Besides being traded on an exchange, ETFs are typically passively managed, meaning there is no dedicated asset manager appointed trying to beat the market. Instead the ETFs typically have an objective of replicating the performance of a specific index or benchmark, like specific stock, bond, commodity and currency indices or baskets.

Trader offers a wide range of Exchange Traded Funds from providers such as iShares, Powershares, Rydex, StreetTRACKS, SGAM ETFs, Lyxor ETFs and many more.

Why trade ETFs

ETFs have a number of other advantages for investors compared to unit trusts. Firstly, ETFs are listed and trade all day compared to unit trusts that are priced once daily. Secondly, the spread (difference) between the buying and selling prices is smaller for Satrix (one example of an ETF) than for unit trusts.

Versatile, low-cost trading with ETF’s.

Some ETFs, called Inverse ETFs or Short ETFs, replicate the inverse performance of the index or benchmark, offering investors the chance to benefit from falling prices. Meanwhile, Leveraged ETFs offer a fixed amount of leverage on the performance of an index, usually around 2:1 or 3:1.

The passive management of ETFs also typically results in a low-cost structure relative to traditional funds. This benefit, combined with the availability of leveraged or inverse tracking of specific indices or benchmarks, makes ETFs ideal for intelligently creating diversified portfolios. The trader can express individual views and preferences and gain efficient exposure to specific sectors, regions or indices.

Another general feature is that the ETF stocks trade very close to the net asset value of the underlying fund assets. This is ensured because so-called 'authorised participants' – typically large institutions – can exchange ETF stocks directly with the fund, with the actual underlying asset used as in-kind payment. Hence, authorised participants will take advantage of any arbitrage possibilities if the price of the ETF share is notably higher or lower than the underlying net asset value. The effect of this is ensuring the ETF share price stays close to the net asset value.

Clients can then track the performance of an ETF through the Shyft Trader platform. It is possible to monitor the price of the ETF through the Price List and to use the charting system to identify longer-term price trends and review past performance.

What are Exchange Traded Commodities (ETCs)

Exchange Traded Commodities (ETCs) are similar to ETFs, except they track the performance of an underlying commodity index rather than stock market index. ETCs are also traded in the same manner as Shares but provide exposure to a range of commodities and commodity indices, which include Energy, Agricultural, Metals and Softs.

The difference is that an ETF index usually tracks a group of companies or a sector, where an ETC is based on an index of a commodity or a basket of commodities. The way the ETC is linked to the underlying commodities depends on the exposure of ETC. 

ETCs are open-ended Shares, like ETFs, and are also asset backed by physical bullion or commodity (Futures) contracts.

Because ETCs are open-ended, new ETCs can be created according to demand. Therefore ETCs are just as liquid as the underlying commodities market – either the physical or futures market.

Why trade ETCs

• Easy access the markets – ETCs are traded as Stocks on an exchange
• Low cost
• High liquidity (Matching the underlying commodities physical or futures markets)
• Daily transparent pricing