Exchange Traded Funds or ETFs are traded similarly to stocks. ETFs are funds that pool assets together to form a single tradable asset. Brokers may pool these assets from more than one asset class, sector or exchange or limit them to track a single underlying asset. The commonest ETFs work in correlation with other assets. Such correlations can be direct (move in the same direction as the correlated asset) or inverse (move in the opposite direction to the underlying asset). In any case, the design of an ETF is such that traders can buy varying units of the ETF, just like they can buy units of company ownership in the form of shares.
Forex brokers offering ETFs list selected Exchange Traded Funds (ETFs) as Contracts for Difference (CFDs) assets. ETF CFDs differ from exchange-traded ETFs because the trader does not take physical ownership of the ETF units. Instead, the trader buys or sells contracts based on the price differences of the underlying ETF baskets.
ETFs are traded in two ways. They may be bought or sold on exchanges, which constitute a secondary market for those who want to own the actual ETF units. For those traders who want to trade them as CFDs, the platforms of forex brokers offering ETFs are the preferred venue.
ETFs are leveraged assets. The European Securities and Markets Authority (ESMA), the regulator and supervisor of all European financial markets and individual country regulators, has pegged ETF trading leverage at 1:5 in Europe. Similar conditions are obtainable in other onshore jurisdictions. Some offshore forex brokers offering ETFs provide leverage as high as 1:100 for ETF CFD trading.
Why should traders consider trading ETFs on forex platforms?
A) ETFs are composite assets that allow a trader to gain exposure to assets pooled from different asset classes or different regions of the world. Imagine a situation where a trader tries to trade some of these assets individually using different accounts and brokers - this would be confusing. This is where the ETF comes in.
B) Some ETFs are used to track the performance of certain assets. For instance, the SPDR Euro Stoxx 50 ETF (FEZ) tracks the performance of the Euro Stoxx exchange. This exchange is, to a large extent, a measure of the economic sentiment in the Eurozone. If you find it hard to trade Euro pairs in the FX market or you find it too confusing or risky, you can decide to trade this ETF, which has already been structured to track Eurozone sentiment and the Euro Stoxx exchange perfectly.
C) Many ETFs are built to work with correlations. So rather than trade a particularly risky asset (e.g. gold), you can trade an ETF that either follows gold prices directly or has an inverse relationship to gold prices.
D) The leveraged nature of ETF CFD trading means that you do not need to come up with 100% of the capital needed to set up an ETF trade. The amount of leverage will determine the margin requirement.
The ETF CFDs are listed on compatible forex broker platforms with bid and ask prices. Spreads can range from as low as two pips to as much as 30 pips or more.
ETFs are traded on a bi-directional basis. Traders can speculate on the ETFs by buying (going long) to benefit from rising prices or selling (going short) to profit if prices fall. The trades are set up using appropriate lot sizes, with 0.1 lots being a typical minimum trade volume. You need to check the individual broker specifications to know how many ETF units are found in 1 Standard Lot and what the tick value of a Standard Lot represents.
Traders trade ETFs based on the composition of the asset basket. Therefore, the fundamentals of the composite assets guide the direction of the ETF's price moves. You would expect an ETF that tracks the movement of the S&P 500 index, such as the Vanguard S&P 500 ETF (VOO), to be sensitive to expectations around interest rate changes in the US. For instance, after peaking at 436.5 in January 2022, the VOO ETF began to decline in tandem with the S&P 500 index as the US Federal Reserve began to raise interest rates in the second quarter of 2022.
Here is a typical trade example showing how to trade an ETF on the platform of a forex broker offering ETF trading. Here are the potential scenarios for both long and short trades. Since no two ETFs are the same or behave in the same way, you have to choose an ETF whose fundamentals you are familiar with before executing a trade. Let us use the example of the Vanguard S&P 500 ETF, commonly known as VOO.
For the VOO ETF, the most sensitive news for this asset at the time of writing remains the interest rate expectations in the US. The US Federal Reserve has embarked on a rate hiking cycle, but you feel this will likely continue well into the new year. Assuming you shorted 1 Standard Lot of this ETF at 349.15 and the price eventually fell to 309.15, what is your profit?
In the same vein, assuming the Federal Reserve decides not to hike interest rates any longer so as not to stoke a recession, we expect the US stock markets to react positively to it. This would lead to a rise in the VOO ETF. What would be your profit if you go long at 337.5 and exit the trade at 392.5?
The trade is set up using a lot size of 0.1.
Please note: CFDs on ETFs are not futures contracts and are, therefore, not subject to expiration. They are also leveraged assets. Leverage of 1:100 means you only need $1,000 to set up a Standard Lot position, as shown in the first example. If you trade with 0.1 lots, you only need $100 as a margin to collateralize the trade, as in the second example.
There are benefits to trading ETFs on FX platforms.
Trading with forex brokers offering ETF trading is a viable way to trade. ETFs are an asset class to consider if you are looking for some bit of diversity and an easily trackable and tradable asset based on market fundamentals. The forex brokers offering ETF trading shown on this site present you with generous contract specifications to make your ETF trading journey worthwhile. Feel free to scroll through our list and create a trading account with a suitable for you broker today.