Finansero explains traditional ETFs Finansero follows EU rules and regulations strictly and offers its clients access to a whole market sector by trading CFDs of ETFs (exchange-traded funds). What are the traditional exchange-traded funds? ETFs are a new way to invest in assets without the hassle of buying individual shares. You can trade an ETF just like you would like any other security, and it will automatically diversify your investment across many different stocks, bonds, or cash-management instruments. How do the exchange-traded funds work? Every shareholder owns a fraction of the ETF but not the underlying assets. Every fund is designed to track the performance of underlying assets. What types of traditional ETFs are there? The financial instrument ETF can be used for different purposes: income, hedging, risk offsetting in a portfolio. Of course, it can be used for speculation on prices. Here is a list of the different types of traditional ETFs: The bond ETFs collect local, state, government, and corporate types of bonds. The industry ETFs are connected to a particular sector such as technology, energy, banking, and more. The commodity ETFs contain gold, crude oil, grain, or platinum commodities. The currency ETFs, logically are dealing with foreign currencies. What are the advantages and disadvantages of the traditional ETFs Transparency, diversification, and tax benefits are the main advantages of traditional ETFs. + Transparency Anyone can monitor the price activity of an ETF, accessing the holdings of a certain fund via the internet. + Diversification You can diversify the market both ways. Vertically and horizontally. When you do it horizontally, you invest in different industries, and when you do it vertically, you invest in shares to commodities. Diversification is much easier with ETFs because you are not buying all the assets one by one but in groups. + Tax benefits Usually, the payment of taxes happens when investing, but when trading ETFs, the taxing happens during the investment period itself. On the negative side, it’s sometimes hard to find buyers (which means low asset liquidity). – Finding a buyer for the ETF The low liquidity of the traditional ETFs is their main disadvantage and the main thing you have to have in mind when approaching them as an investing instrument. – Trading costs As ETFs are exchange-traded, they are subjected to certain fees from the online brokers. – An ETF could close Investors could sell the fund sooner than planned, if it doesn’t bring enough assets and generates high administrative expenses. What are the risks of investing in CFDs of ETFs? Be advised that investing CFDs of ETFs could be extremely risky because of such instruments’ complex and speculative nature. Every client who is trading CFDs must be fully conscious of the risk of losing part or even all of the invested capital in a short period due to high volatility and high leverage. That is why such type of investment is not suited for all investors. Tracking errors The tracking error is calculated based on the prevailing price of the ETF and its underlying assets. It consists of the difference between the ETF returns and its reference asset.