An Exchange traded fund trades like a stock where the net asset value is not calculated at the end of each trading day like in cases of mutual funds. ETF shares are traded on public stock exchanges making it easier for ownership to be transferred. They can therefore be economically acquired, held or disposed of.
Units of an exchange traded fund can be created or redeemed by authorized participants who may be big investment companies or banks. Forex Etx traders are keen on momentary arbitrage opportunities that maintains ETF price close to the fair value. They gain by buying the ETF for less than the underlying security.
ETFs are similar to mutual funds in that they both represent managed collections of individual stocks. The difference however comes in where ETFs have lower investment minimums compared to mutual funds. Forex Etx traders purchase ETFs for the price of 1 share known as market price while mutual funds may not be suitable investment since they are not based on the fund’s share price.
Different exchange traded funds are used in different nations. The following are ETFs common in the United Kingdom
1. EWU – iShares MSCI Index ETF
This exchange traded fund is sponsored by Guggenheim to track the MSCI index by concentrating on financial, energy and material sectors. Holdings such as the HSBC and Vodaphone Group have been in the trading market since the early 1990s.
2. FKU- First Trust United Kingdom AlphaDex ETF
This tracks the Defined United Kingdom Index. It also includes stocks such as Lloyds Banking Group from the BMI universe that meet particular requirements. It represents sectors such as financials, industrial and consumer staples.
3. GPP- Gartman Gold/ British Pound ETF
This fund utilizes British Pound to invest assets in gold market so as to provide returns. It does this by holding exchange traded futures, British pound contracts to 25 % of the total assets in subsidiary.
4. FXB- Currency Shares British Pound Sterling Trust ETF
This fund deals with currencies focusing specifically on the British pound. It tracks the price of British Pound Sterling net of Trust Expenses. By depositing British Pound Sterling, interest is gained which in turn pays the Trust expenses.
5. GBB – iPath GBP
This fund is designed to track British Pound price by comparing it against the Us Dollar rate of exchange. The GBP exchange rate increases with appreciation of the British Pound and decreases with the depreciation of the British Pound.
Types of Exchange Traded Funds
a) Index ETFs
These funds replicate specific index performance. Indexes can either be stocks, bonds, commodities or even currencies. Index funds track how an index performs by holding contents of the index in its portfolio. They also work through replication where they invest all the assets in the securities underlying an index.
b) Stock ETFs
This kind of ETFs are used to track large cap and small cap stocks. They also act as sector funds for broad sectors in finance and technology. Such funds can be used on fashionable trends too.
c) Commodity ETFs
This invest in commodities like agricultural products or precious metal like Gold. Forex Etx traders benefit from Gold Exchange traded funds provided in the UK. Commodity ETFs are used to track non security indices. They trade just like shares to provide a wide range of commodity indices.
d) Currency ETFs
These exchange traded funds are used to track major currencies under currency shares. Banks have been known to launch the Dollar Money Market ETF in London. This provides investors with access to FX Spot change as well as interest rates of local institutions.
e) Inverse ETFs
Derivatives are used to make inverse Exchange traded funds to help forex Etx traders benefit from a decline in the value of an underlying benchmark such as daily futures. Traders are able to profit from falling prices by using advanced investment strategies.
f) Leveraged ETFs
These funds use financial engineering techniques including equity swaps and derivatives to achieve more sensitive returns to the market. Returns are achieved by trading futures contracts.