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What are ETFs and how do they work? 
What are ETFs and how do they work? 
Updated over a week ago

An ETF, or exchange traded fund, is a type of investment fund that’s traded over an exchange, like an ordinary stock. These funds work by having an investment thesis of their own (e.g. green energy, or disruptive technology) which they use as a guide to purchase assets that fit into that specific thesis.

In the case of green technology, this could be the stocks of companies involved in renewables, the production of solar panels, or even the underlying commodities such as copper and lithium, which are becoming ever more important to the green revolution. In the case of an innovative technology ETF, this could be anything from biotech stocks, semiconductors, electric vehicles, and even crypto.

As you can see, an ETF can hold all manner of assets in its portfolio including stocks, bonds, currencies, commodities, crypto, and more. In this way, when you purchase the ETF, your capital is proportionally exposed to all the underlying assets that the ETF owns.

The ETF itself tries to maintain its valuation at a level that’s comparable to the net asset value of all the assets it holds, however, depending on the sector, it’s not unheard of to have ETFs trade at a premium when compared to the assets held. Crypto-based ETFs are a case in point here, as the ease of access, and custody they provide non-sophisticated crypto investors comes at a price.

ETFs provide useful diversification to your trading account, in a similar manner to indices. Indeed, the most popular US-based ETFs are actually index funds that hold the same securities in the same weightings as the popular indices they track (e.g. the S&P 500, or the Russell 2000).

But since CFDs allow you to trade those indices without the need of an ETF, the real value of ETFs is that they allow investors to allocate capital to specific “themes” without having to trade the underlying assets they hold. ESG (Environmental, Social, and Governance) ETFs are an example of an investment that follows a specific philosophy. The same goes for crypto, or emerging market ETFs.

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