CFDs vs ETFs

Contracts for difference are derivative products that allow traders to speculate on the price movements of underlying assets. This can involve the index, share, commodity, forex and treasury markets.

When trading CFDs, the investor does not actually own the underlying financial asset. Instead, it is an agreement where traders will exchange the difference in an asset’s value from the initial start of the contract until the position is closed. Those who wish to bet on financial products without managing the constraints of buying and selling therefore greatly appreciate this type of product. Whether CFDs lead to profits or losses depends on which direction the market moves in. For example, if the value of the asset increases, the investor will earn a profit, provided that the amount earned exceeds the brokerage fees. Conversely, if the value of the CFD decreases, the investor will instead lose money when reselling. In a short-selling situation, the performance result reverses: the investor earns money in the event of a drop in value but loses in the event of a rise.

To trade CFDs with us, you simply need to open an account. The particularity of CFDs and what makes them attractive to many investors is partly due to the use of leverage. This means that a trader only needs to deposit a small fraction of the full trade value in order to open a position, giving you better exposure to the financial markets. While this can result in magnified profits if successful, this can equally result in significant losses.

Exchange-traded funds are part of the UCITS investment funds that are publicly traded and regulated across the world. They are able to track the performance of an index, for example, the FTSE UK 100 stock market index, showing whether its value moves up or down. An ETF reflects only a fraction of the value of an index; it can be worth one thousandth of the index’s value. There are various types of exchange traded funds, which are explained below.

A passive ETF works by replicating the characteristics of an underlying stock market index for an investor to buy and hold the position in the long-term, in order to track its movements. Index investing does not seek to beat the market and it has lower management fees, therefore it is cheaper than trading active ETFs. This passive style of investment is the most commonly used.

An active ETF offers a certain degree of freedom to the portfolio manager, who can move away from the composition of the underlying stock market index in order to improve its performance and reduce risks. Mutual fund investors often use day trading strategies for ETFs instead of investing in direct mutual funds, making the portfolio much easier to manage.

Among these passive and active ETFs, there also exists physical ETFs and synthetic ETFs. Within the framework of physical ETFs, portfolio managers buy each of the components of the stock market index directly in order to replicate their performance, and synthetic ETF managers use swaps and other derivative financial products to replicate the performance of the index. Therefore, if physical ETFs can offer the advantage of replicating the performance of the underlying index with great precision, they are generally accompanied by significant costs. Conversely, if synthetic ETFs have more attractive fees, their performance may turn out to be uneven, especially since certain counterparties may be lacking in comparison with financial derivatives.

CFDs allow traders to bet on price movements for an abundance of financial instruments, while adjusting the size of its positions more precisely using leverage. This means that when opening and closing positions, the investor therefore has better agility.

Whereas an ETF can only be processed during the opening hours of the stock exchange, this is not the case for CFDs, which instead have their quotes extended. The forex market, for example, can guarantee consistent quotes, which allows investors to take advantage of longer trading sessions, while reducing the risk of slippage from one session to another.

The steps to trade ETFs can sometimes prove to be complex, especially for beginner traders. On the other hand, CFDs are much easier to access by simply opening an account and speculating on price movements of the underlying asset. We offer both live and Sign Ups​, so that our traders can practise with virtual funds before opening a position with real capital.