Advantages of ETF Trading
Continuing the discussion of ETFs, which are exchange-traded funds, contain a set of security assets that can be traded throughout the day, traders take advantage of instantaneous arbitrage opportunities, which keep the ETF price at a fair value.
If a trader can buy ETFs effectively at less than the price of the underlying securities, they will buy ETF shares and sell the underlying portfolio, locking the price difference.
Some ETFs utilize gearing, or leverage, through the use of derivative products to create reverse ETFs or ETFs with leverage. Inverted ETF traces the opposite returns from underlying assets – for example a reverse ETF of gold will earn 1% for every 1% decrease in metal prices. ETFs seek to get double returns from the underlying assets. 2x gold ETF will earn 2% for every 1% increase in metal prices.
By having an ETF, investors get diversified index funds as well as the ability to sell briefly, buy by margin and buy a single share (no minimum deposit requirement). Another advantage is the cost ratio for most ETFs is lower than the average mutual fund. When buying and selling ETFs, you must pay the same commission to your broker that you will pay with a regular order.
There is the potential to benefit taxation on the cash flows generated by ETFs, since the capital gains from sales in those funds are not communicated to shareholders as commonly as stocks of mutual funds.
Examples of widely traded ETFs
One of the most widely known and trafficked ETFs tracks the S & P 500 Index, and is called Spider (SPDR), and trades under the SPY ticker.
IWM tracks the Russell 2000 Index.
QQQ tracked down the Nasdaq 100, and HE tracked the Dow Jones Industrial Average.
ETF sectors exist that track individual industries such as oil companies (OIH), energy companies (XLE), financial companies (XLF), REIT (IYR), biotech sectors (BBH), and so on.
ETF Commodities exist to track commodity prices including crude oil (USO), gold (GLD), silver (SLV), and natural gas (UNG).
ETFs that track foreign stock market indices exist for most emerging markets and many developing countries, as well as other ETFs that track currency movements around the world.