What is an Exchange-Traded Fund (ETF), and How to Trade ETFs in MT5?
10 MIN READ
Team BitDelta Pro • 05 Nov 2024
ETFsExchange-traded FundHow To
10 MIN READTeam BitDelta Pro • 05 Nov 2024
ETFs are investment models that have gained popularity among investors due to their flexibility, opportunities for diversification, and ability to lower risks. This guide answers questions about ETFs and their functions, ETF investments, and how users can trade ETFs in MT5. This guide also discusses the diverse opportunities of ETFs in the global markets.
Key Takeaways
ETFs offer portfolio diversification and flexibility, allowing investors to invest in different assets, including stocks, bonds, or commodities, from a single fund.
MetaTrader 5 (MT5) is a feature-rich trading platform offering a smooth ETF trading experience with charting, technical analysis, and automated trading.
ETFs are affordable investment tools due to their relatively low entry costs.
An Exchange-Traded Fund (ETF) is an investment fund that owns a basket of assets, including stocks, bonds, and commodities. ETFs are traded on the exchange market just like individual stocks, which means investors can buy or sell ETF shares anytime during the trading day. Their categorisation differentiates ETFs to follow the performance of a certain asset, index, or even industry. For example, an ETF can have an investment strategy mirroring the S&P 500 index, one of the US stock markets’ most followed indices. ETFs may also be based on bonds and commodities such as gold or oil.
ETFs are becoming more popular as they offer a simple means of investing in various asset classes, such as stocks, bonds, commodities, etc., and industries. Trading ETFs resembles stock trading and offers the combined benefits of mutual funds and stocks. MetaTrader 5 is an excellent tool for trading and investments, particularly for ETFs; its advanced charting systems, technical analysis indicators, and real-time market data simplify and streamline ETF trading for all types of investors.
Comparison of ETFs with mutual funds and individual stocks.
ETFs vs Mutual Funds: ETFs are traded throughout the day on an exchange during trading hours, while mutual funds are traded once a day after the markets close.
ETFs vs Stocks: With stocks, one acquires shares in a specific company. ETFs involve buying into a diversified basket of companies or assets, minimising risks in an investment portfolio.
History and Evolution of ETFs
The first ETF, the SPDR S&P 500 ETF, was developed in the US in 1993 to mimic the profits of the S&P 500 index. Over the years, the ETF market has grown substantially, with thousands of ETFs now available globally. The main goal of the introduction of ETFs was to provide investors with a more affordable way of tracking the performances of major indices. Today, multiple ETFs focus on certain sectors, commodities, and international markets.
ETFs have gained popularity in the modern investment world for their low entry costs, convenience, and ability to invest in several markets simultaneously. Currently, ETFs account for a large part of trading turnover on major exchanges and are used by individual and institutional investors for different objectives.
How ETFs Work?
The operating model of an ETF involves an ETF issuer, an authorised participant (AP), and an asset pool. The AP is usually a large investment bank expected to purchase the securities the ETF intends to hold. These securities are then packed into a ‘creation unit’ and given to the ETF provider, who sells the ETF shares to the public and trades them on the stock market.
Like most assets, the price of ETF shares throughout the day depends on the performance of the assets held in the fund and the interests of the buyers and sellers.
Types of ETFs and the Categories in ETFs
ETFs can hold multiple types of assets, including:
Stock ETFs
Stock ETFs offer an investment product that gives direct exposure to stocks or equities in a particular market, sector, or country. For example, the SPDR S&P 500 ETF (SPY) passively mimics the price of the S&P 500 Index, providing investors with exposure to 500 of the largest listed companies in the US.
Bond ETFs
Bond ETFs are primarily focused on fixed-income securities, such as government bonds, corporate bonds, or municipal bonds. Investors invest in bonds mainly due to their relatively lower volatility than stock ETFs.
Commodity ETFs
Commodity EFTs are exchange-traded funds based on the price of commodities such as gold, silver, oil, and other agricultural products. They allow investors to invest in commodity markets without owning the physical commodity.
Currency ETFs
These ETFs replicate the price of certain currencies or currency pairs, thus giving investors access to the foreign exchange (forex) market without directly trading or owning them.
Sector and Industry ETFs
Sector ETFs focus on specific economic sectors, such as technology, healthcare, and energy. These ETFs are helpful for investors who wish to profit from particular industries or minimise the market’s overall risk.
International ETFs
International ETFs expose investors to foreign markets, enabling them to invest in different countries. Some of these ETFs can even be based on a particular country or a group of countries or mimic international indices.
Inverse and Leveraged ETFs
Inverse ETFs are created to receive gains when the underlying index or asset loses value. Leveraged ETFs are designed to multiply the returns of a asset by leveraging borrowed funds. These ETFs are typically used by professionals who seek to assume a higher risk level.
Benefits of Investing in ETFs
There are multiple advantages of investing in an ETF. Some of them include:
Diversification: Diversification is one of ETFs’ main advantages, helpful for traders seeking to diversify their portfolios across various industries. As baskets of asset classes, ETFs mitigate the poor performance of certain investments.
Cost Efficiency: ETFs are cheaper than mutual funds because they do not actively manage their portfolios. This makes them preferable for low-cost investments with a potentially high long-term return.
Liquidity and Flexibility: ETFs are traded in the market like any other stock, affording their investors liquidity and flexibility that is not easy to get in mutual funds. Investors can buy or sell ETF shares at any time during market hours, making it easy to trade in the market and make changes as and when necessary.
Transparency: ETFs are expected to reveal their holdings to investors daily. This openness keeps investors informed, allowing them to make informed decisions about their investments.
What is MetaTrader 5 (MT5) Trading Platform?
MetaTrader 5 (MT5) is a multi-asset trading platform developed by MetaQuotes Software Corp. It is one of the most popular and easy-to-use platforms, equipped with modern technical analysis tools and automated trading capabilities suitable for traders at every level. MT5 enables smooth and efficient trading in various financial markets, such as stocks, forex, commodities, and ETFs.
MT5 is an upgraded version of MetaTrader 4 (MT4) that includes new and advanced features and functions, like new chart and analysis tools, an economic calendar, new types of orders, and more.
Key Features of MT5 for ETF Trading
Below are some of the main features that make MT5 an ideal platform for ETF trading.
Advanced Charting and Technical Analysis: MT5 provides traders with various charting tools and technical indicators that help them assess the performance of ETFs in real-time.
Automated Trading with Expert Advisors (EAs): A major advantage of MT5 is that it allows users to engage in automated trading. Traders can use Expert Advisors, special programs that enable Automated Trades by following specific parameters and indicators. This feature is helpful for ETF traders who wish to benefit from market swings and not be monitoring markets 24/7.
Access to Multiple Asset Classes: MT5 is a multi-asset platform, which means that traders can trade ETFs, stocks, forex, and commodities, making it a suitable trading platform for investors looking to trade a variety of securities and diversify their portfolios.
Multi-Currency and Multi-Language Support: The MT5 platform supports multiple languages and currencies, catering to traders from around the world. This is helpful to those who want to trade international ETFs or gain cross-border market access.
How to Invest in ETFs through MT5?
Below are detailed guidelines on how to get started with your first ETF investment on MT5:
Step 1: Opening an MT5 Account
To begin trading ETFs on MT5, you must first configure your trading account. Here’s how:
Choose a Broker: Choose a broker that offers the MT5 trading platform and ETF product offerings. Make sure the broker you choose is appropriately regulated and has a good standing in the market.
Creating A Trading Account: First, you must create an MT5 trading account with the broker of your choice. The MT5 platform is suitable for use with Windows, Mac, iOS, and Android operating systems.
Fund Your Trading Account: To fund your MT5 account, you must choose one of the payment methods supported by the broker you are using. This can be done through bank transfer, credit card, or online payment options.
Step 2: Choosing the Right ETFs on MT5
MT5 provides its clients with a vast choice of ETFs. Here’s how to find the right ones:
Use the Market Watch Window: The MT5’s Market Watch window allows you to view the available ETFs that can be traded. ETFs can also be classified as per your strategy and investment goals.
Analyse ETF Performance: Compare ETFs’ market performances using MT5’s advanced charting and technical analysis features. Identify trends, critical levels of support and resistance, and utilise other tools that assist in decision-making..
Evaluate Expense Ratios and Diversification: When choosing an ETF, it is important to consider the expense ratio, the type of assets it holds, and the level of diversification it offers. This is crucial for long-term investors since low-cost, well-diversified ETFs are generally healthier long-term investment tools.
Step 3: Placing an Order on MT5
Placing an order for an ETF on MT5 is straightforward:
Choose Your Order Type: MT5 offers several order types: market, limit, and stop. Market orders are executed at the current market price, while limit and stop orders allow traders to set the trading price.
Place the Trade: After choosing an ETF and the order type, you will be able to execute the trade on MT5. The platform will fulfil your order depending on the current market situation.
Consider Dollar-Cost Averaging: Setting aside a given amount of money into the market at certain intervals helps minimise the impact of market fluctuation and decreases the overall price of an investment.
Step 4: Monitoring and Managing Your ETF Investments
Once you have invested in ETFs, it is important to monitor and manage your positions.
Regularly Review Your Positions: Another important feature of MT5 is the portfolio management tool, which enables you to track your ETFs’ performances in real-time. Regular review of your positions is recommended to monitor your investments’ performances and make necessary alterations.
Use Risk Management Tools: MT5 comes with Stop-Loss and Take-Profit orders, which can help you protect your open positions. Stop-Loss orders will sell your ETF shares once their value declines to a specific level to prevent further losses. You can also realise profits by ordering to sell the shares at a particular price.
Risks and Considerations of Investing in ETFs
While ETFs offer many benefits, there are risks and considerations to be aware of when dealing with ETFs.
Market Risks: ETFs come with market risk, as the performance of the respective assets can influence their prices. MT5’s advanced charting and analysis tools simplify risk management and enable you to track price fluctuations and make appropriate decisions.
Liquidity Risks: Some ETFs might have low trading activity, which results in high bid-ask spreads and low liquidity. Therefore, consider an ETF’s liquidity before you decide to trade it on MT5 to avoid a situation where you cannot sell your shares.
Tracking Error: Tracking error refers to the difference in the returns of the ETF and the index or asset the fund is trying to replicate. This can result from management fees, changes in the index, or other factors.
Tax Considerations: Since ETFs are more tax-efficient than mutual funds, taxes are still associated with buying or selling ETFs. If you are selling ETF shares at a profit, this may result in capital gain taxes required by your jurisdiction’s laws, depending on the holding period. However, if you are trading ETFs through MT5, you should speak to a tax consultant about the tax implications that apply to your specific circumstances.
Bottom Line
ETFs are one of the best investment products that can help you diversify and lower the risk ratio of your portfolio. Due to their versatility, ETFs can allow you to buy stocks, bonds, commodities, etc., or increase exposure to international markets. The MT5 trading platform on BitDelta Pro has everything you need to trade ETFs. It offers real-time market data, charting, trading automation capability, and support for various asset classes, making it suitable for both beginner and experienced traders.
At BitDelta Pro, we have also launched our newest feature—Copy Trading—which allows you to copy the trades of experienced traders in a few clicks. Depending on the trader you follow, this will help you decrease the risk of losses, lower your drawdown, and increase your chances for profit. Following this article’s guidelines, you can start investing in ETFs and securities through the MT5 platform on BitDelta Pro. Before investing your money, always ensure you have researched, used risk management tools, and checked on your investments.
FAQs
No, because ETFs, like stocks, are traded during regular market hours.
The costs may differ depending on your broker. Some brokers may also charge other costs, like spreads or commissions, so it is advisable to confirm with your broker. BitDelta Pro offers trading with ETFs on MT5 with low transaction fees.
Some factors to consider include the expense ratio of the ETFs, their asset backing, diversification, and historical performance. MT5 offers tools that can assist investors in analysing and selecting ETFs that match their objectives.
Some aspects of MT5 include charting and automated trading features, built-in community chat, and an incorporated economic calendar, which are unavailable in most traditional platforms.
Yes, ETFs are usually held for the long term because they have low fees, offer diversification, and are also tax efficient. Tools in MT5 enable you to track and adjust your portfolio as you trade, making the platform suitable for long-term investors.
ETFs offer several benefits, including diversification, lower costs, liquidity, and the ability to trade throughout the day. Additionally, ETFs can track a wide range of indices, sectors, and assets, allowing investors to choose specific investment strategies.
Yes, ETFs carry risks, including market risk, sector risk, and liquidity risk, depending on the assets they track. Some ETFs may be more volatile than others, and it’s important to research the underlying assets and market conditions before investing.
DISCLAIMER
This communication is for informational and educational purposes only and should not be construed as financial, investment, or legal advice. BitDelta Pro does not guarantee the accuracy, completeness, or timeliness of the information provided. Trading in traditional securities (such as forex currency pairs, stocks, bonds, and commodities) carries inherent risks, including potential loss of principal. Users are encouraged to carefully evaluate their financial objectives, conduct their own research, and seek independent financial advice before making any trading decisions. BitDelta Pro is not liable for any losses or damages resulting from actions taken in response to this communication.
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