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An Exchange-Traded Fund (ETF) is a popular—sometimes puzzling—investment vehicle that traders and investors use to gain exposure across multiple asset classes, such as stocks, bonds, commodities, currencies, cryptocurrencies, etc. Therefore, ETFs are often used for diversification purposes.
ETFs have become increasingly widespread since their introduction in the early 1990s. We can think of an ETF as a pooled investment product designed to typically track (or mirror) a specific index, such as the S&P 500 index in the US, which lists approximately 500 of the largest US companies.
Do not confuse ETFs with mutual funds and index funds. Although each boasts similarities, there are some noteworthy differences. Mutual funds are typically actively managed investments (through a portfolio manager), attempting to outperform a market average, while index funds tend to mirror specific market indices and are more passively managed. Therefore, the latter is usually a cheaper form of investing in terms of low-cost management fees. ETFs can be either actively or passively managed.
ETF shares are traded just like individual stocks on a stock exchange. So, ETF shares can be bought and sold through the trading day during exchange hours. And, like a share of stock, an ETF works with a Bid and Ask price: the Bid price is the trader’s sell price, and the Ask price represents the current buying price for traders, with the difference between the two denoting the Bid/Ask spread. The key point to be aware of here is that the ETF does not sell shares to investors; they are traded only in market transactions.
Regarding fees for ETFs, there are two important terms to consider: the Net Asset Value (NAV) and the Expense Ratio. The NAV is essentially the total value of all the investments held within the ETF, subtracted from the fund’s liabilities and subsequently divided by the shares outstanding in the ETF fund. This is usually reported on a per-share basis once per day and can, particularly in times of volatility, differ from the market price of an ETF during the active trading session. The Expense Ratio is how much it costs to operate the ETF, an annual cost to ETF investors. This will usually be expressed as a percentage, computed by dividing the fund’s total cost by the total assets under management (you will not need to calculate this as it will be provided). However, if you trade with FP Markets (a globally leading Forex and CFD brokerage) via Contracts for Differences (CFDs) through our MetaTrader 5 (MT5) platform, by buying at the Ask price and selling on the Bid price throughout the day, you will get the desired exposure at the current market price.
The following ETFs can be traded with FP Markets through CFDs, allowing traders and investors to trade both rising and falling markets with leverage of up to 5:1.
The ACWI ETF (ticker: ACWI) was launched in early 2008 and opened the door to a popular global stock index with more than 2,300 securities. As of writing, the top holdings in terms of weight are Apple (APPL) at 4.35%, Microsoft Corp. (MSFT) at 3.38% and Amazon (AMZN) at 1.57%. Regarding sector weight allocation, information technology leads the pack at 20.3%, followed by financials at 15.5% and healthcare at 12.2%.
Although the focus is on the MSCI ACWI, the MSCI World’s long-term performance is essentially the same. The MSCI World Index only tracks the stocks of developed markets. In contrast, MSCI ACWI includes stocks in developed and emerging markets. Year to date, the ACWI is higher by nearly 9%, showing a series of higher highs and lows on the daily timeframe. Therefore, this may be an ETF that trend followers and breakout investors may be attracted to, particularly if the ETF breaks the $93.21 February top.
Traded on the NYSE Arca exchange, the SPDR Gold Shares ETF (ticker: GLD) has been active since its inception in 2004. According to the SPDR Gold Shares Fact sheet, the Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.
Several drivers favour the price of gold, including the US Federal Reserve (Fed) closing in on hitting the pause button on policy tightening, and the US dollar, according to the US Dollar Index, is poised to peak (down nearly 2% year to date).
Year to date, the price of GLD is nearly 9% higher and showing no sign of slowing down. There is a clear uptrend present on the daily timeframe, with dip-buyers likely watching price action closely now: price action is seen retracing from the 13 April top at $190.37, with the ETF currently trading at $184.23.
The iShares Core US Aggregate Bond ETF (ticker: AGG) was launched in 2003 and offers broad exposure to the total US investment-grade bond market, aiming to track the Bloomberg US Aggregate Bond Index as a benchmark. The total net assets, as of writing, are $88.07B.
More than 70% of the fund is allocated to high-quality securities, with more than 40% focussing on US Treasuries. The fund is also greatly exposed to longer-dated bonds, particularly 7–10-year maturities.
The ETF is currently higher by around 2.3%, year to date. As you can see from the daily chart below, the ETF dropped from $100.87 on 5 April and appears to be consolidating before either potentially breaking out to the upside and breaking 2 Feb high at $101.12 or pushing lower and targeting 2 March low at $96.09.
Charts: FP Markets MetaTrader 5 (MT5)
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