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An exchange-traded fund or ETF is an investment fund that comprise a collection of assets including shares, commodities and bonds. An ETF is a single entity and operates in a similar manner to a share. However, ETFs offer the opportunity to spread risk over several assets with a single transaction.
Common ETFs can track certain sectors in the market, such as marijuana or the biopharmaceutical industry. Some ETFs also commonly track market indices such as the FTSE 100 or DOW Jones.
ETF trading provides the opportunity to trade on margin by utilising leverage. When trading an ETF with leverage, you only need to deposit a percentage of the full trade value in order to open a position. This initial deposit is known as margin. However, your profits and losses are based on the full trade value.
Read about the differences between a spread betting and CFD trading account.
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ETF trading can provide many advantages in comparison to other assets. These advantages include:
Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.
A leveraged exchange-traded fund (ETF) is a financial instrument that tracks a collection of individual assets, such as shares, commodities and bonds. The main characteristic of leveraged ETFs compared with ETFs in the underlying market, is that your profits and losses are magnified, as you are trading on margin. Find our more about leveraged trading.
All investments contain a certain amount of risk, including ETF trading. However, when compared to trading individual shares, ETF trading benefits from diversification, which could help reduce risk. This is because an ETF tracks a selection of assets and isn’t reliant on the performance of a single asset or instrument. Consult our risk-management guide to help reduce your exposure to risk when trading.
Trading ETFs can benefit investors in a number of ways. ETFs track several assets within a single trade, so when compared with trading on individual shares, ETFs can be a less costly investment, while also offering a more diversified selection of assets. Additionally, ETFs can provide exposure to markets that may not otherwise be available. Discover more advantages of ETFs on our ‘What is ETF trading?’ page.
Trading stocks focuses on trading a single company. ETFs instead provide exposure to a tracked market index, in a similar way to the S&P 500 or FTSE 100. ETFs also track a selection of assets that can include stocks, bonds and commodities, for example. Although an ETF is essentially a wrapper tracking several assets, they are still traded like a share. Find out more about how ETFs work.