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ETF market basics

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

What is an ETF, and how does ETF trading work?

Exchange traded funds (ETFs) are pooled investment vehicles that trade on exchanges in the same way as shares of publicly traded companies. Just like buying stocks, ETFs involve fractional ownership of companies, but indirectly, with the investor owning shares in the ETF which in turn owns the relevant stock. An ETF provider selects an index to track, and buys shares to recreate the price performance of that index in a similar way to passive mutual funds. The big difference, which has made ETFs one of the most popular retail investment products worldwide, is that they trade throughout the day on exchanges. What’s more, ETFs have low fees compared to most other types of fund. Since the first ETF was launched in 1990, they have grown to become one of the most important parts of the retail stock market, accounting for a growing portion of overall trading volume.

What is the ETF market? 

The ETF market is highly concentrated. In the US, the most important providers are BlackRock and Vanguard, each with about a 30% market share. Next comes State Street with 13%, followed by five other providers who command a market share over 1%. In addition to concentration by provider, the market is concentrated in a few specific funds, with the US’ oldest and largest ETF, an S&P500 tracker fund, crossing the AUM $500 billion mark in February 2024. Collectively, the ten largest individual ETFs account for just under 30%[of total ETF AUM, making the ETF market far more concentrated than any other financial market.

Which ETFs are most popular? 

The best-selling asset category of ETF are stock ETFs, and S&P500 tracker funds are the biggest of them all. Stock ETFs account for the vast majority of sales and fund AUM, with bond ETFs a distant but respectable second. Together, these two asset classes account for the overwhelming majority of ETF volume, with smaller specialised funds focusing on commodities, money markets, or alternative assets making up just a few percent of overall ETF volume.

What exchanges do ETFs trade on? 

ETFs trade on many of the world’s largest exchanges, with the major American, European and Asian exchanges the most important globally. The New York Stock Exchange’s NYSE Arca exchange is the home of the largest global ETF funds, the top three of which all track the S&P500 index. The tech-heavy NASDAQ exchange, also based in New York, is another leader in terms of ETF listings. Outside of the US, Tokyo is one of the most important centres for ETF trading worldwide. Other significant ETF exchanges include Frankfurt, London and Sydney.

ETF market history

ETFs trade on stock markets, but their history as an asset class is much more recent. The first ETF was launched in Canada in 1990, and the first US ETF followed in 1993. That US fund remains the largest single ETF today. Other markets were slower to launch their first funds, with the first European ETFs (in Germany, then the UK, Sweden and Switzerland) arriving in 2000. In a relatively short time, ETFs have grown into a major asset class in every market where they trade, attracting investors with their low fees and simple diversification.

What are ETFs for? 

ETFs are designed to track the performance of an index or basket of securities. ETFs are one of the most important tools used in passive investment strategies alongside traditional mutual funds. But what is passive investing? Passive investing is an investment style where the investor tries to capture the overall return of a market or index. In passive investing, the aim of a fund or portfolio is to match, rather than exceed, the performance of a given benchmark, a characteristic which separates it from active investing, where portfolio managers trade to beat their benchmark.

Active versus Passive

Over the long term, it is difficult for active managers to consistently beat market benchmarks with a large stock portfolio (actively trading a $100 million fund is not the same as a small day trading account), especially once you account for the impact of fees. ETFs were designed to fill the gap in the market for a cheap, passive fund that replicates a benchmark, but which does not have the complications of lockup periods, out-of-market-hours settling, and entry and exit fees. That makes them one of the simplest ways for retail traders to use passive investing, or related semi-active styles such as smart beta, in their portfolio.

 

Trading ETFs explained: how are ETFs traded?

ETFs are listed and trade on markets like stocks; in the ETF business, this kind of trading is known as the secondary market. You can buy shares in an ETF throughout the trading day, making them more liquid and flexible than traditional mutual funds. ETF providers manage the fund by buying the necessary stock in the right proportion to mimic their target index, for example buying a weighted basket of S&P500 stocks equal to the value of the fund. The ETF can then trade freely on the secondary market.

Primary markets and authorised participants

Market prices fluctuate and ETFs experience price flows; inflows and outflows based on investor interest in the fund. In order to maintain tracking, the ETF provider has a relationship with a bank or broker (or small group of them) known as the authorised participant (AP). Their job is to create or redeem shares of the ETF so that the share value always tracks the index, and the AP creates or redeems them by selling or buying shares from the issuer. This trading relationship is known as the primary market, and it ensures the price of the fund matches its index as closely as possible.

ETF market participants

ETF market participants are similar to those active in the stock market, since ETFs are listed, trade, and settle like any other stock. That means there are few differences in terms of market infrastructure, the payments and settlement work sometimes known as ‘financial plumbing’. However, when it comes to investment decision makers, ETF market participants have significant differences from the overall equity market, and this can impact their price action.

Stock exchanges and market infrastructure

Like stocks, ETFs are listed and trade on exchanges, which provide a centralised marketplace for listed securities. Exchanges either include or work closely with a clearing house, which is responsible for ensuring shares are exchanged for cash in a timely and correct fashion. Since the 1980s most of the behind-the-scenes work of exchanges and clearing houses takes place electronically and is invisible, but these processes are still a vital part of price discovery, market stability, and ensuring successful transactions.

Market makers and trading companies

Market makers continuously offer both a bid and ask price in a security, profiting off the difference between the two, known as the spread. Banks and brokerages act as market makers in the ETF secondary market by buying and selling shares in the ETF over an exchange.

Investment portfolio managers

ETFs are common retail investment products, and extremely popular with small investors. But these funds are used across the investment landscape, with giant pension funds getting involved alongside individual traders. Unsurprisingly, volume is dominated by very large players, who may use either active or passive investment strategies. Pension funds are one of the largest players in the ETF marketplace, alongside other long-term investors such as life insurance providers. Typically, these large investors will make big trades and adopt a buy-and-hold strategy, rebalancing portfolios occasionally. Other use smart beta, a blended active-passive investment style that uses themed ETFs. These funds select stocks by additional criteria, such as value, and typically have higher fees than classic or vanilla ETFs.

Retail investors

Retail investors are the most numerous and least important ETF market participant. ETF investment is well-suited to the needs of small investors, offering flexibility and low fees. That makes them popular with small scale individual investors as well as larger high net worth (HNWI) and ultra high net worth (UHNWI) individuals who make up the retail market. Whatever the size of their account, these traders adopt similar strategies to pension funds, but on a smaller scale, buying stock ETFs as a long term growth strategy. Most retail investors focus on the best known ETFs, such as funds tracking the CAC40 or FTSE100.

Trading ETF CFDs and direct ETFs: steps to getting started

ETFs offer a compelling case to investors – low fee, low complexity products that allow you to share in the fortunes of specific equity markets with built-in diversification. Once you understand the basic questions – what is an ETF? How to trade ETFs? – you are well on your way towards ETF and index investment. But ETFs aren’t just for investors: day traders also use ETFs as a way to share in the price action of national equity markets without the confounding effect of individual company performance. That makes them ideal for news and sentiment trading, as well as their traditional role in stock portfolios. But whatever type of ETF trader you are, if you want to buy ETFs you will need to open and fund an ADSS trading account. If you are new to the ETF space, consider running a demo account first, until you have mastered the basics.

When can I trade ETFs?

ETFs follow the same market hours as the wider stock market. The most traded ETFs are American, so traders looking to buy US500 or 100 index ETFs will need to do so in US market hours, when the contracts are live trading. That works out to 18:30 to 01:00 Gulf Standard Time. Of course, you can place orders outside of these hours, which will be filled when the market reopens.

Liquidity and risk in ETF trading

Large ETFs like the FTSE100 are highly liquid and can be traded with ease throughout the session. For some ETFs, especially those dealing with smaller and more specialised markets, volumes can be thinner, potentially adding to volatility. In terms of price action, ETFs will move with the market they are based on, like any other indices. Most of the stock ETFs are made up of large cap companies from a given exchange, and offer some innate diversification by virtue of including multiple different shares in one product. Since stocks are a risk on asset, ETFs will normally perform well during periods of economic growth and growing investor confidence, and poorly when investors flee to safety. Potential hedges for stock ETFs include bonds, especially highly rated government bonds, and gold.

Conclusion

ETF investment offers a simple way for traders to track the performance of key equity indices. The ETF Dubai and UAE market is well-developed, and ADSS offers clients the opportunity to invest in a wide range of ETFs at low cost, across markets, geographies, and sector. Understanding indices and the basics of stock trading can help you get to grips with this market, but the best way to learn is always by doing. Once you feel ready to start placing trades, you can open a demo trading account and start trading today without risking any of your capital.


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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

ADS Securities LLC – S.P.C (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates under First Category: Dealing in Securities and Fifth category: Arrangement and advice (Introduction). ADSS is a Limited Liability Company – Sole Proprietorship Company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.

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ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.