Exchange-traded funds (ETFs) are a type of investment fund that track the performance of a subset of the market, such as certain types of stocks, or specific market indices. They are composed of a basket of securities selected according to the fund’s objectives, and structured as a listed fund on a stock exchange.

Popular among the investing public, ETFs offer the following benefits:

• High liquidity, as they are tradeable throughout the trading day
• Low fees, as most are passively managed; those that are actively managed may be more costly
• Inherent diversification, as ETFs track several different securities or duplicate a market index which is comprised of multiple constituent stocks
• Wide selection, as investors can choose different types of ETFs according to sector, geographical region, market capitalisation, and more

Because they cover many different markets and assets, ETFs are well-suited to a wide range of trading goals and objectives. ranging from long-term buy-and-hold, to day trading. Investors can choose among ETFs based on their risk appetites, trading strategies and timelines.

ETFs come in various forms, each offering unique exposure to different asset classes and market strategies. Below is an overview of the most common types of ETFs and how they work.

Equity ETFs

Equity ETFs are perhaps the most well-known types of ETFs. They are based on equities – i.e., stocks and shares issued by publicly listed companies – and can offer investors exposure to all corners of the equities market.

Investors can pick from equity ETFs that track blue-chip stocks, micro-cap companies, dividend-paying stocks for income, and consumer defensive stocks to hedge against market downturns.

Alternatively, equity ETFs may also be composed along regional lines, allowing traders to diversify their portfolio across East and West, or between developed economies and emerging ones.

Bond ETFs

Bond ETFs track the performance of the bond market, striving to replicate the returns of an underlying bond index. Bonds are debt instruments that pay a fixed interest rate – known as a coupon rate – each year to holders of the bond.

Because bonds can fluctuate in yield with interest rate changes, this leads some traders to buy and sell them on the open market to capture potential profits. However, other investors hold bonds in their portfolio for the interest payments they provide.

Bond ETFs cater primarily to the latter group, as bonds only reach their full potential after all coupon payments are complete. However, those who seek exposure to the price action of the bond market can do so by trading CFDs with popular bond ETFs as the underlying asset.

Index ETFs

An index is a market benchmark that tracks the performance of an underlying collection of securities, such as a country’s best-performing stocks, shares of companies in a specific sector, or different classes of assets such as bonds.

Some of the most popular market indexes (or indices) are used as shorthand for macroeconomic events. For instance, the S&P 500 is often taken as a representative of the American economy on the whole. During a prolonged period of downtrend in the S&P 500, it can be taken as a sign of economic downturn in the US, which has major implications for other economies around the world.

Since a market index is just a benchmark, there’s no way to directly invest in one. Instead, investors can look to Index ETFs, which are funds that are set up to replicate the performance of an underlying index.

Owning shares of an index ETF is typically more affordable and convenient than attempting to replicate the index yourself, which would entail purchasing the same number of shares on your own.

Commodity ETFs

Commodity ETFs work much the same way as Index ETFs, but they track the performance of an underlying commodity instead.

Commodities are essential raw materials and resources such as metals and minerals, agricultural output, and fossil fuels. Their prices are impacted by supply and demand levels, which depend on geopolitical and macroeconomic factors, ranging from weather conditions, extraction and production levels, and government policies to conflict and wars.

For these reasons, commodities offer high liquidity and ample trading opportunities for traders. Given the wide range of commodities available, traders can also choose among uncorrelated markets to diversify their holdings and hedge against risk.

ETFs are flexible and well-suited to a variety of trading strategies, explaining their wide-ranging appeal. Here are some trading strategies that work well with ETFs.

Dollar-cost averaging (DCA)

This trading strategy is designed to increase ownership of an ETF over time. The idea is to make regular purchases at fixed intervals, spending a fixed budget each time.

Purchases are made regardless of price, with more shares bought when the price is low, and fewer shares purchased when the price is high. This effectively averages out short-term price volatility, while steadily increasing the number of ETF shares you hold as time progresses.

Note that this is a buy-and-hold strategy that can take some time to produce results. Thus, it is best utilised as part of a long-term investment strategy. In DCA, it is more important to pick an ETF with proven sound fundamentals, instead of untested or new ETFs with flashy but short track records.

Swing trading

Because ETFs track the performance of underlying securities or markets, they tend to replicate the same price trends. This means that some ETFs may be suitable for swing trading, especially if there are clear uptrends and downtrends on the price chart.

This idea behind swing trading is to profit by capturing portions of larger price movements, instead of pinpointing exact tops and bottoms (which is notoriously hard to do, even for advanced traders). Thus, it is not necessary to predict when a price trend will start, but it is highly useful to be able to identify one when it is in progress.

After identifying a clear price trend, a swing trader then enters the trade with the appropriate position (going long for uptrend, short for downtrends). The position is typically held until a profit level is reached, or the beginning of a trend reversal is spotted.

Some traders use swing trading for short- to medium-term strategies, depending on the duration of the swing. Unlike in day trading, it is not unusual for swing traders to hold positions overnight.

Short selling

Short selling is an advanced trading strategy that allows a trader to profit during a market downtrend. This is accomplished by first “borrowing” the shares from the broker and selling them immediately. Then – when the price drops – the trader buys the shares at a lower price to return to the broker, pocketing the difference as a profit.

Notice that this only works should the price of the ETF goes down. If the price instead increases, the trader would have to make up the difference, incurring a loss in the process.

Short selling can be a viable strategy for ETFs that have exhibited price declines to clearly defined triggers in the past, such as interest rate announcements, or company earnings reports. Should similar scenarios appear, some traders may consider short-selling strategies, depending on their risk tolerance and market outlook.

Sector rotation

Traders often explore sector-focused ETFs to apply a sector-rotation strategy to hedge market risk. As its name suggests, this strategy involves identifying sectors that are negatively correlated, and moving between them as appropriate.

For instance, during strong economic growth, company equities tend to offer high portfolio growth. However, when the economy goes into recession, corporate earnings tend to decline, dragging down share prices.

During these periods, some investors may consider rotating into ETFs that track consumer defensive stocks for potentially greater price stability. This can limit portfolio losses, while also enhancing returns with dividend payouts, if available.

Seasonal trend trading

A related idea to sector rotation is seasonal trend trading. This strategy hinges on the idea that during certain seasons and major festivals, selected sectors experience a surge in demand, which could translate to share price increases.

The idea, then, is to identify when such seasonal surges might occur for the targeted sectors, and buy into ETFs tracking such sectors before the season begins. Note that seasonal trend trading also works to hedge risk; by identifying a clear down season, traders might choose to exit their positions ahead of a potential seasonal downturn to manage risk.

Seasonal trend trading may be more relevant for sectors that exhibit cyclical demand levels. Some examples are:

• Energy, which tend to see increased demand in summer and winter
• Retail, which tends to experience higher demand in the fourth quarter of the year
• Automotive, travel and leisure. These sectors tend to see increased demands when the economy is booming, and vice versa
• Gold, which tends to increase in price when there is economic uncertainty
• Dividends stocks, as they may increase in price when payouts are near, driven by income-seeking investors

Whether you’re a beginner looking to embark on your investment journey, or an experienced trader seeking to test advanced strategies, you can trade the price movements of ETFs via CFDs with an online trading account. This does not involve direct ownership of the ETF but allows for leveraged exposure to its price changes. In this section, we will go over some important factors to consider, as well as tips on getting started.

Determine your trading style

Firstly, decide how you want to trade ETFs, and for what purposes. Are you planning to accrue ETF shares for capital appreciation? To trade on price action? To diversify your portfolio? Perhaps you’re looking to gain exposure to emerging market trends?

Answering these questions will help you determine how long is your investment timeline, what strategies you will use such as swing trading, day trading, or DCA, how you will manage risk, and what your profit targets are. These are essential elements of your trading style.

Select a broker based on your style

Once you have decided on your trading goals and objectives, and the strategies you will use, you will have a clearer picture on what type of broker you should choose.

For instance, if your aim is to DCA into equity ETFs over a prolonged period, a broker that offers Regular Savings Plans (RSP) might be best for you. Meanwhile, if you’re looking to trade the price action of a wide range of ETFs rather than buying and owning shares, a CFD broker such as Vantage allows you to trade price movements of ETFs via CFDs, without owning the actual fund.

CFDs or Contracts-for-Difference are leveraged products that let you trade the price action of underlying ETFs without direct ownership. They offer capital efficiency, lower barriers to entry, and the ability to take both long and short positions.

Given the leverage involved, CFDs may not be suitable for all investors and often require prior trading experience.

Open a trading account

Once you’re ready to trade ETF CFDs, you can proceed to open a live trading account. Here are the steps to follow.

1. Click here to go to our Account Opening page
2. Fill in the fields and click “Create Account”
3. Follow the on-screen prompts.
4. Once your account is approved, fund your account to start trading. You can start trading from $50.
5. Choose your preferred trading platform. Vantage offers award-winning MT 4 and MT 5 platforms, web-based trading, and our proprietary mobile app for trading on the go.
6. Select your preferred market or asset to spread bet, and place your first trade.

Want to explore trading ETF CFDs before committing real money? Try our demo account. You can access real-time data, strategise your trade and test them out, covered by the safety of paper trading.

Research the ETFs you want to trade

ETFs come in many different types and categories, tracking different markets across geographical regions and asset classes. It’s helpful to first choose the market or sector you want to trade, and research the options available to you.

This will help you focus your efforts to build familiarity with a few core ETFs, allowing you to make better trading decisions over time. Also, as popular ETFs are designed to track the performance of proven markets, you can conceivably cover a large swath of the market with a few well-picked ETFs.

To help you with shortlisting the ETFs you want to trade, look into both technical and fundamental aspects to get a sense of their potential, and how well they fit your trading style.

Consider trading strategies that let you open both long and short positions – doing so is a great way to expand your profit potential, compared to conventional strategies that only profit when the market is going up.

Manage your risk

Last but not least, don’t neglect your risk management; find out from your broker what risk management tools and educational resources they offer.

Learn how stop losses and take profits work, and how you can apply them to your trade. Educate yourself on the risks that come with different styles of trading so you have a clear idea of what you’re in for. You can also try seeking out the experiences of advanced or professional traders to flatten your own learning curve.

Equally important is limiting your position size to a reasonable one to avoid getting wiped out in a few bad trades. Remember that maintaining a favourable risk-reward ratio is more important than your win-loss rate.