Exchange traded funds (ETF) are a collection of assets built into a single fund that can be traded on a stock exchange, much like the shares in a company.
The price of an ETF moves depending on the average value of the underlying assets within.
Why choose an ETF?
Because an ETF is essentially a basket of assets, price movements tend to be less volatile than single stocks.
There are ETFs for just about any trading strategy you can think of. You can trade emerging market currencies, precious metals, stock sectors – every base is covered.
ETFs trade in assets that are difficult for private investors to access. Oil, for example, is expensive and hard to purchase at market prices.
The same is true of many asset classes – particularly currencies and commodities.
Lower cost and risk
Although there are likely to be transaction charges, owning shares in an ETF incurs few of the costs or risks of owning individual assets. And when selling, ETF shares can be liquidated quickly at the current market price.
They can be traded easily through brokers and many electronic trading platforms.
Speculation vs investment
Speculation differs from investment in the level of risk. It is a trading strategy that aims to make as much profit as possible as quickly as possible, the caveat being that you could lose a significant part of your initial outlay.
Finding a strategy
We're going to cover three strategies here:
- Currency speculation
- Commodity speculation
- Emerging market speculation
These areas are among the most common for speculators, as there tends to be more volatility, and where there's volatility there are large price swings.
But remember the risks – large price swings can go down as well as up. Speculators must accept the risk that they could lose principal capital.
$$ Trading tip $$
Look for an ETF with high trading volumes – this is a sign that it provides good liquidity, and therefore accurate price discovery. It also means you can sell quickly. If your trade starts to go wrong, you may be able to get out before incurring too many losses.
1. Currency speculation
The foreign exchange (forex) market is inaccessible to private investors direct but is through funds – including ETFs.
Forex trading involves speculating about the performance of one currency against another – one of them is often the US dollar. Here are some examples of currency ETFs:
- Japanese Yen Trust ETF
- Australian Dollar Trust ETF
- US Dollar Bullish Fund
- UltraShort Euro Fund
Currencies move for a variety of reasons, the most common being economic data, so get to know the data releases – what they mean, when they’re published.
Professional forex traders, will have access to spot news alerts through their trading desk. You won't. The next best thing is the internet – many media groups have news alert services that are only a few seconds slower.
Look out for big market-moving data releases such as US Payrolls, GDP reports and any growth indicators – purchasing manager surveys, for example. And be ready to hit your buy or sell button whenever a central bank is about to make an interest rate decision – especially the US Federal Reserve.
Follow the right people on social media – market commentators from the Financial Times, Wall Street Journal and other financial media are all over this, and are sometimes quicker in disseminating market-moving news on Twitter than over the media they work for.
Geopolitical events also move currencies – the US dollar climbed sharply against the Russian rouble when Russian troops entered Ukraine in late 2014, and continued to rise as economic sanctions were later announced.