How to buy, trade or invest in ETFs and funds

Pooled funds are a good way to gain exposure to an entire selection of stocks from just one entry point. To achieve the same result as an index tracking ETF, you’d need enough capital to not only buy each stock, but enough of each to build proportions that mirror the index weightings. For most, this is simply too expensive and logistically impossible.

A well-diversified portfolio lessens risk by including as many uncorrelated assets as it can. That is, if you only buy a small selection of stocks, your risk profile is higher than it would be if you instead opted for a wider range of shares from several sectors that are independent of each other. An index ETF is one of the most effective ways to diversify, thereby mitigating a portion of the risk of holding just a few, concentrated assets.

Pooled-fund investment vehicles and exchange traded products like ETFs and ETCs aren’t restricted to shares. You can gain entry to a variety of markets that have traditionally been off-limits to many traders and investors. These include commodities, currencies, corporate and government bonds, interest rates and real estate.

Because passively managed funds only incur the operating expenses and fees needed to track a chosen benchmark – like the FTSE 100 – their fees are significantly lower than actively managed funds. Active funds will also often charge performance fees for achieving above-market returns, which are largely omitted in passive funds like ETFs.

Funds that are traded on-exchange are highly liquid – meaning that you can enter and exit the fund easily and quickly. While several on-exchange funds may trade at either more or less than each share’s net asset value (NAV), the prices of ETFs are less subject to the forces of supply and demand. This means that they trade very close to their NAV.

Investing is usually better suited to those willing to take a longer-term view. As you buy and hold a share when investing, you’ll be restricted to ‘going long’ (you’d aim to buy low and sell high at a later date to earn a profit).

With us, you’ll invest from zero commission² on US shares, and from £8 commission per trade for UK-listed ETFs. ETFs enjoy the benefit of avoiding the large performance fees typically associated with actively managed funds.

When you invest in UK ETFs with us, you should check whether the ETF complies with UCITS regulations. UCITS stands for ‘undertakings for collective investment in transferable securities’, a directive that provides a regulatory framework for funds managed and domiciled in the UK and the EU. If a fund is UCITS compliant, it adheres to a common standard for risk and fund management. It’s easy to spot compliant ETFs as they will have ‘UCITS’ in the name.

Investment trusts are also an option if you’d like an actively managed alternative to passive ETFs. Investment trusts are closed-ended funds that are allowed to borrow capital to ‘gear’ their investments. Shares of investment trusts can trade at a premium or discount to their NAV.

You can access ETFs and investment trusts through our stock trading account.

If you’re looking to take a shorter-term position, you could consider trading. Because you’ll use CFDs, which are derivatives, you’ll be able to ‘go short’ in addition to going long. Going short is the reverse of going long, enabling you to profit if you correctly predict a depreciation in a fund’s share price.

However, please note that short selling is a high-risk trading method because share prices can keep rising – theoretically, without limit. It’s essential to take steps to manage your risk.

It’s also important to note that CFDs are leveraged instruments that differ substantially from traditional investing.
When investing, as you buy and own the asset, you pay the full amount for the asset upfront. By contrast, leverage means you can open a position with a small deposit (called ‘margin’) instead of paying the full value of your position. However, loss and profit are still calculated based on the full position size and can substantially outweigh your initial margin deposit.

Once you’ve set up a live trading account with us, you’ll have over 2500 ETFs from which to choose.

Trading ETFs allows you to take a position on a wide selection of markets, including themes, sectors, industries and even the economy as a whole. However, you could also use CFDs to take positions directly on indices, commodities and currency markets.

To invest in ETFs yourself, follow these steps:

1. Create an account or log in and go to your stock trading account
2. Familiarise yourself with our offering of ETFs
3. Select your opportunity
4. Determine the size of your investment and order type
5. Open and monitor your position

To trade ETFs or one of our other available investment funds, follow these steps:

1. Create an account or log in
2. Pick an ETF or fund from within our CFD trading platform
3. Select ‘buy’ to go long, or ‘sell’ to go short. Set your position size and take steps to manage your risk
4. Open and monitor your position

Short-selling, also known as ‘shorting’ or 'going short’, is a trading strategy used to take advantage of markets that are falling in price. The traditional way to short-sell involves selling a borrowed asset in the hope that its price will go down and buying it back later for a profit.

With us, however, you’ll go short using CFDs. Short selling is a high-risk trading method because share prices can keep rising – theoretically, without limit. Because CFDs are leveraged, you’ll also stand to lose more than your initial margin deposit. Learn more about how to manage your risk.

A buy-and-hold investment strategy is suited to stock trading and our Smart Portfolios. It involves a long-term investment horizon and holding onto your investment despite any fluctuations in the stock’s value.

The theory behind a buy-and-hold strategy is straightforward. Buy an asset and hold it until you need to sell it, during which time you should have benefited from years of capital appreciation and income payments.

Pound cost averaging involves investing smaller amounts of capital over a period of time rather than a large sum in one go. When using this strategy, you’ll be averaging out the peaks and troughs of price movements over time. Because prices rise and fall, spreading your investments out means you’ll likely achieve a lower average cost of buying each investment unit.

The below graph shows that saving £100 per month amounts to £20,400 over 17 years. Investing £100 per month in the FTSE 100, however, would have resulted in a return of just under £40,000.

To diversify your investments, you may want to build a portfolio that profits from different stages of the business cycle. ETFs are a possible way to implement a sector-based strategy.

Their relatively low fees allow them to be ‘rebalanced’ when necessary, and their transparency means that you’ll know exactly what the fund is investing in.

Day trading is a technique used by traders rather than investors. It involves buying and selling financial instruments within a single trading day. Day traders attempt to take advantage of small market movements by executing a large number of trades for a relatively small profit each time. Markets suited to day trading include forex, indices and shares.

Swing trading aims to benefit from short-term price patterns, and assumes that prices never go in only one direction in a trend (ie even in a trend, prices will both rise and fall). Swing traders look to make money from the up and down movements that occur in a short timeframe. Essentially, traders employing this strategy will attempt to profit from the small reversals in a market’s price movement.

Hedging could be compared to taking out an insurance policy on your securities, and is a way to mitigate your losses should the market turn against you. It’s achieved by strategically placing trades so that a gain or loss in one position is offset by changes to the value of the other.

Typically, to hedge a position, you would either take an opposite position in a closely related market (or in a closely related ETF in this example), or the same position in a market that moves inversely to your original investment.

Although hedging could lessen your risk, please take note that you’ll still incur fees on both positions. For example, if you were to use CFDs to go long and short on the same market in equal amounts, your exposure would be zero – but you’d still be charged fees for your trades. This should be figured into your calculations.