ETF Trading

ETF Trading provides diversified exposure to major market indices. Read our ETF Explainer Guide Below then Proceed to Strategies

>>> PROCEED TO ETF STRATEGIES

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READ OUR ETF GUIDE BELOW THEN PROCEED TO ETF STRATEGIES

What is ETF Trading01

Types of ETF Trading02

Trade Both Long and Short03

Calculating Profits and/or Losses04

ETF Trading Examples05

Key Benefits of ETFs06

Margin Obligations07

Risks of Trading in ETFs08

Styles of ETF Trading09

Tools & Resources10

How to Open an Account11

Supported Brokers12

Introduction to ETF Trading

Navigate down the page using the buttons below to learn more about ETF Trading.

1. What is ETF Trading

2. Types of ETF Trading

3. Trade Both Long and Short

4. Calculate Profits and/or Losses

5. ETF Trading Examples

6. Key Benefits of ETFs

7. Margin Obligations

8. Risks of Trading in ETFs

9. Styles of ETF Trading

1. What is ETF Trading?

ETF is the abbreviated term for Exchange Traded Fund. ETF Trading involves trading on an exchange allowing you to buy and sell funds or underlying products in microseconds as easily as an individual stock through an exchange.

ETFs are managed funds listed on an exchange. The great benefit of an exchange-traded fund is that you are investing in a portfolio of shares rather than an individual stock so you get instant diversification, without having to buy all of the individual stocks that make up the fund.
ETFs are not just restricted to stocks, you can buy and sell ETFs that track futures markets, options markets, different styles of trading, like value or growth ETFs, bond markets and fixed interest markets. In fact, if you would like exposure to futures markets, but lack the capital and don’t like CFDs then ETFs are an excellent alternative. Some of the MyTradingAdvisor strategies favour ETFs over Futures and CFDs.

2. Types of ETFs

There are many different types of Exchange Traded Funds (ETFs) ranging from passive ETFs that seek to replicate the performance of a major market index or benchmark to actively managed ETFs that seek to outperform the market. In addition, ETFs cover foreign markets, sectors of the market, different investment styles and can even give exposure to commodity markets and derivative markets. Some of the main types of ETFs are as follows:

1

INDEX TRACKING FUNDS ON UNITED STATES INDICES

There are many Index Tracking ETFs listed on the US Exchanges (particularly NYSE Arca) providing exposure to the stocks that make up the Major Market Indices. Stocks in an index are known as a basket and if you purchase an ETF you are actually the beneficial owner of those shares that make up the index. These include the S&P500 Index, the Dow Jones Industrial Average, Russell 2000 and the Nasdaq and more. Common ETFs include SPY, which is a liquid S&P500 ETF and QQQQ, which is a liquid Nasdaq ETF. The goal of an index fund is to track the index very closely. Any deviation between the ETF Net Tangible Asset (NTA) value and the underlying index is called tracking error and is closely monitored by investors.

2

INDEX TRACKING FUNDS ON OTHER INTERNATIONAL MARKETS

Many of the Exchange Traded Funds (ETFs) are not just listed on the NYSE Arca, but are listed on other international exchanges throughout the world and cover the non-US markets giving exposure to countries and regions throughout the world including the XJO in Australia, the NZX50 Index in New Zealand, the MSCI Germany Index, the FTSE100 and the list goes on. These types of ETFs are useful for investors looking for exposure to offshore markets without stock-specific risk.

3

FOREIGN CURRENCY ETFS

There are ETFs that track the movement of foreign currencies, which gives investors exposure to a view on a currency without the next to convert physical cash at exorbitant bank exchange rates or enter into Margin FX transactions. There are also ETFs that give exposure to baskets of currencies, as opposed to individual currency pairs. These types of ETFs are useful for hedging exchange rate risk or simply trading a view.

4

INDUSTRY AND SECTOR ETFS

Many of the popular ETFs give exposure to a particular industry or sector of the market. The benefit, if you have a view on a sector is that you don’t need to select individual stocks to trade industry or sectoral views. Examples might include the Healthcare sector or industries that make up components of the healthcare sector, like pharmaceuticals or BioTech.

5

COMMODITY MARKET ETFS

Commodity Market ETFs give exposure to a particular commodity, like Gold or Crude Oil, as opposed to an Index. Generally, the underlying products on Commodity ETFs are made up of futures contracts, which track the price of Gold, Oil etc. The great benefit of these products is that you can trade or invest into them with a relatively small account compared with a futures contract and you don’t need to worry about rollovers, expiry dates, contangos, backwardation etc. You can simply go long or short the ETF and it trades like a stock, i.e. in dollars and cents.

6

DERIVATIVE ETFs

In addition to Commodity ETFs there are other types of ETFs that also utilise Derivative products as the underlying investment instrument. These can include Buy/Write Indices, spread indices, options ETFs with the purpose being to track the futures market for the underlying market or target a particular trading style.

7

STYLE ETFs

There are also ETFs that look to track investment styles such as value or growth ETFs that look to track value based benchmarks or growth stock based benchmarks. Some other styles might include equally weighted ETFs that equally weight stocks in an index, rather than weighting the stocks by market cap or price.

8

BOND ETFs

Bond ETFs provide exposure to debt market products like Government Bond and Corporate Bonds. Bond ETFs can be considered fixed interest ETFs and provide a unique way to invest in interest rate markets without having to own the underlying bond. The main advantage is you can invest in small amounts and enter and exit the market when you choose, as opposed to waiting for maturities or an illiquid secondary market in an underlying bond.

9

EXCHANGE TRADED NOTES (ETNs)

Exchange Traded Notes are another type of debt instrument issued by a bank making them similar to bonds and represent a way to invest in the fixed interest market without having to buy individual note issues separately.

10

INVERSE ETFs

Inverse ETFs are a type of Exchange Traded Fund that moves in the opposite direction to the underlying index. An inverse S&P500 Index ETF will move down when the market moves up and up when the market moves down. The advantage of these instruments is that they can be used for hedging in uncertain times and don’t suffer from short sale bans that could be prevalent when shorting direct equities in turbulent markets.

11

LEVERAGED ETFs

A leveraged ETF provides leveraged exposure to an underlying market, such as the Dow Jones Industrial Average or S&P500 Index. Leverage can be 2x or 3x the movement of the underlying index and they provide a low cost way to get a volatile exposure to that index. There are however a few snags to keep in mind. The goal of the funds is to give a leverage daily return, as opposed to an annual return on the underlying market. Also as there is a borrowing component interest costs are factored into the performance so you don’t just get a straight 2x or 3x performance when compared to the index. In fact, due to the interest drag, these funds tend to have a worse risk-adjusted return compared with a non-leveraged fund. These types of funds are however very useful for short term traders who are looking to magnify short term exposure to the market.

12

ACTIVELY MANAGED ETFs

Dividend ETFs target stocks that make up a particular segment of the market that have a reasonable dividend payout. These types of funds generally pay distributions to investors with the main benefit being the investor can simply invest in the ETF to get exposure to high yielding stocks rather than investing in those stocks directly.

13

DIVIDEND ETFs

Actively Managed ETFs look to outperform the market by actively managing exposure in a particular market category and make underweight or overweight positions according to the manager’s view, rather than in line with a market index. Managers of an Active Fund are seeking alpha, which refers to the number of percentage points their fund exceeds the performance of the benchmark. Given the scale of many funds outperforming an index can be extremely difficult as managers need to move large quantities of stock, which can have a dramatic effect on the price. The overall conclusion is that most active managers fail to outperform the benchmark for any length of time.

13

OTHER ETF STYLES

There are a number of other types of ETFs that target particular strategies. An example and some ETFs we really like are the Volatility ETFs that consist of selling front month and buying back month futures on the Volatility Index. Others might include Tax Deferred ETFs, Arbitrage ETFs, and the list goes on.

KEY FEATURES OF ETFS

ETFs are exchange-traded and give you an entitlement to share in the capital growth and dividend distributions of the fund. Other key features are as follows:

1

ENTITLEMENT TO DIVIDENDS

By owning units in the ETF, you are entitled to any fund distributions in the form of dividends.

2

CUSTODY WITH ONLINE BROKERS

With most online brokers, such as Interactive Brokers the units you buy in your account are owned by a custodian or a sub-custodian who takes ownership of the fund on your behalf. A custodian is generally a large institution that holds the units under a trust structure on your behalfs, such as BNP Paribas, Bank of New York Mellon, Interactive Brokers, ABN Amro and a large number of other well-known institutions. You are the nominee under the trust structure, which means you are the beneficial owner of the units in the fund. The advantage is that this is a low-cost structure with a lot of flexibility. The disadvantage is that the fund is not registered under your name at the share registry directly.

3

LONG TERM INVESTMENT

Investing refers to buying the actual units in an ETF through an exchange with the aim to profit in the long-term. Such an investment is usually held for a number of years, in some cases even decades, before materialising profits. When you own shares in an ETF you are also eligible for dividends (the amount of profit a company distributes back to the shareholders). Investors are typically looking for a combination of capital growth, income from dividends and dividend growth.

4

STOCK EXCHANGES

Stock Exchanges generally have a Clearing House. Clearing Houses clear and settle Share Transactions executed on the Stock Exchange for an ETF. The primary role of the Clearing House is to guarantee the settlement of obligations arising under the ETF Transaction registered with it. This means that when your Stock Broker buys or sells ETFs on your behalf, neither you nor your broker needs to be concerned with the creditworthiness of the other side of the trade. The Clearing House will never deal directly with you, rather the Clearing House will only ever deal with its Clearing Participants – that is your broker (where your broker is a Clearing Participant), or where your broker is not a Clearing Participant, your ETF Broker’s Clearing Participant.
When a Stock Transaction is registered with the Clearing House, it is novated. This means that the ETF Transaction between the two brokers who made the trade is replaced by one contract between the buying broker (or its Clearing Participant) and the Clearing House as seller and one contract between the selling broker (or its Clearing Participant) and the Clearing House as buyer.
In simple terms, the Clearing House becomes the buyer to the selling broker, and the seller to the buying broker.
You, as the client, are not party to either of those ETF Transactions. Although your ETF Broker may act on your instructions or for your beneﬁt, the rules of the Clearing House provides that any contract arising from an order submitted to the market is regarded as having been entered into by the executing broker as principal. Upon registration of the ETF Trade with the Clearing House in the relevant Clearing Participant’s name, that Clearing Participant will incur obligations to the Clearing House as principal, even though the trade was entered into on your instructions.
The Clearing House ensures that it is able to meet its obligation to Clearing Participants by calling a margin to cover any unrealised losses in the market if the transaction incurred a borrowing component though this is more relevant to Margin Lending clients or ETF CFD Traders.

5

TRADING ETFs

Trading ETFs, compared with investing, is a more hands-on activity with daily or weekly monitoring of your account, which involves buying and selling with the aim to capitalize on shorter-term fluctuations. The purpose of trading is to generate income to supplement a primary source of income with the possible secondary goal of perhaps one-day trading for a living.

6

GO LONG AND SHORT

Traders can speculate on markets going up or down. If a trader shorts an ETF they are hoping for the stock to fall in value, so they can profit. This can be a great strategy in down markets, but typically most traders look to trade short term microbursts generally to the long side as long ETFs spend more time going up than down, on average.

7

MARGIN LENDING

ETF traders typically employ the use of leverage to magnify potential returns. Because ETF traders are only holding stock for short periods of time, the downside risk can be lower than a buy and hold approach (but not in all cases) with the idea being to avoid adverse moves. As such there is more potential for a trader to utilise margin lending (or even ETF CFDs) to produce a return, not only on their own capital but on the borrowed capital as well. Unfortunately, the success rate on trading is rather low, so most traders get themselves into trouble with leverage because leverage also magnifies losses. The purpose of MyTradingAdvisor is to give you the necessary knowledge and experience to guide you towards becoming a profitable trader.

8

COMMISSIONS

Traders need to save money on commissions and interest, hence trading online through a trading platform is the best option. MyTradingAdvisor facilitates trading on sharemarkets around the world through Interactive Brokers. Your brokerage account is held and funded directly with Interactive Brokers. MyTradingAdvisor provides training, troubleshooting, support and advice via our Traders Room but your counterparty risk on your brokerage account is direct with Interactive Brokers, not MyTradingAdvisor.

9

TAX

Profits made from trading in shares are treated as income and are typically subject to income tax and depending on the jurisdictions, may also be subject to stamp duty and GST. Investing is typically more tax effective and less fee intensive than trading so carefully consider your options before taking the plunge.

3. Take Both Long and Short Positions

With ETFs you can take either direction when entering a transaction or trade.

You can take both “long” and “short” ETF positions and even trade inverse ETFs. If you take a long position (i.e. purchase an ETF), you profit from a rise in the price of the ETF, and you lose if the price of the ETF falls. Conversely, if you take a short position (i.e. sell ETFs), you profit from a fall in the price of the ETF and lose if the ETF price rises. In practice, rather than going short an ETF you can get the same exposure by going long an inverse ETF. Some strategies even retain permanent holdings in an inverse ETF and look to generate Alpha (outperformance) on the long side of the portfolio in an endeavour to increase risk: adjusted returns.

At MyTradingAdvisor we focus more on Swing Trading approaches to the markets though we do cover Systems Trading in detail and that includes systems that may buy and sell in the same day.

4. Calculating Profits and/or Losses:

The amount of any gross profit or loss made on an ETF Transaction will be equal to the difference between the value of the ETF when the ETF is opened and the value of the ETF when the ETF is Closed Out, multiplied by the number of shares held in the ETF. The value of the Underlying Product is determined by the exchange by reference to the relevant Pricing Source. The calculation of profit or loss is also affected by fees and charges payable in respect of each ETF Transaction. There may be certain adjustments made in relation to the ETFs which may affect the calculation of profit or loss.

FOR EXAMPLE:

This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.

Assume:

You purchase 10 ETF shares in SPY and the price at which you enter into the ETF is $250; and

You later Closed Out the ETF by “selling” at a higher price of $280.

The resulting gross profit on the transaction would be $300 being sale price ($280) less buy price ($250) x 10 (the number of shares).

The net profit is determined after deducting commission, funding charges, transaction costs and any other charges.

The impact of fees on the net profit realised will be dependent on many factors and in particular, the length of time the open position was held as the funding charge is applied daily.

5. ETF Trading Examples

We have described how ETF Transactions work and the basic points of ETF Trading.

One of the key advantages ETFs have over other financial instruments is that relatively small lot sizes can be traded – lot sizes can be as small as 1 unit (one share or one dollar per index point).
In the US Margin Lending on ETFs can be a good alternative to using CFDs, which are banned for trading by US residents and citizens. Given the variety of ETFs available they offer a great way to get exposure to different views on the market. The inherent diversification from one ETF also saves a lot in transaction fees compared with buy or selling the individual stocks that make up an ETF.
Many ETFs are very liquid and also have liquid options markets which can be utilised to speculate on the price movement of the ETF or for generating extra income.

6. Key Benefits of ETF Products

ETFs provide a number of benefits which must be weighed against the risks of using them. The benefits of ETFs are as follows:

DIVERSIFICATION

Where an ETF covers a basket of shares that make up an index you get instant diversification from the purchase of just one ETF product, rather than having to buy different shares. This protects from stock-specific risk and also ensures you will get a return similar to the benchmark the ETF is seeking to replicate or outperform.

HEDGING

Inverse ETFs can be used to hedge your exposure to the Underlying Index.

SPECULATING:

You may take a view on a particular Underlying Index, Sector, Industry or Product and invest in an ETF according to this belief.

LIQUID

Many ETFs have extremely high liquidity meaning the volumes traded make it easy to buy and sell during exchange hours.

PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS:

ETFs do not always require a rising market to make money. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ.

LEVERAGE

Some ETFs involve a high degree of leverage. Leveraged ETFs enable exposure to the movements in the value of the Underlying Index on a 2x or even 3x basis.

LOW STARTING CAPITAL REQUIREMENTS

ETF Trading typically requires a much lower amount of starting capital than traditional stock brokerage accounts for Shares as you can obtain exposure to a basket of stocks without having to actually purchase that basket of stocks. The ability to micromanage position size also means you can use compounding strategies more efficiently if you have a profitable strategy.

AUTOMATED TRADING

Another big advantage of ETF Trading is that modern technology allows the automation of most tasks, from system development to copying other peoples trades, to order execution. With a little nouse, you can use powerful software programs to help you gain an edge in the market, and at the same time save huge amounts of time!

TRADE FROM ANYWHERE

Literally, trade from anywhere! One of the greatest advantages of trading ETFs online is the ability to trade from anywhere that has an internet connection. If you are one of the lucky few with the skills to make profitable trading decisions you can trade from home, work, a resort, the beach, a golf course, a resort, on the move… you get the idea.

7. Margin Lending on ETFs

ETFs are subject to margin obligations when using Margin Lending and you must have sufficient balance in your Trading Account for security and margining purposes. You are responsible for meeting all margin payments required by your ETF Broker if you are using Margin Lending in conjunction with ETF Trading.

TYPES OF MARGIN

There are two components of the Margin Requirements which you may be required to pay in connection with ETFs; Initial Margin and the Variation Margin.

INITIAL MARGIN

In order to enter into a Margin Lending Transaction on an ETF you will be required to pay your ETF Broker the Initial Margin or have an amount of Net Free Equity in your Trading Account that is at least equal to the Initial Margin. This amount represents your initial deposit on the ETF and you do not have to pay interest on this amount.
Depending on the particular ETF Transaction, the market volatility for the Underlying Product and the Trading Platform you use, the Initial Margin for an ETF Transaction will typically be between 30% and 50% of the face value of the ETF Transaction. However, it is not uncommon for Initial Margins to be above this range.
Margin Requirements differ depending on the Trading Platform you choose and the ETF Broker you choose. In choosing a Trading Platform, you should carefully consider the Margin Requirements of each Trading Platform as Margin Calls could have an adverse impact on your investment.
Your ETF Broker may, in their sole discretion and without the need to notify you, change the percentage Margin Requirements for an ETF from to time. You should refer to the Initial Margin schedule on your Trading Platform for more information about the Margin Requirements each time you enter into an ETF Transaction.

VARIATION MARGIN

As the value of your ETF Trade will constantly change due to changing values of the Underlying Market, the Margin Requirement (being the minimum Trading Account balance you must maintain in order for your ETF Broker not to Close Out some or all of your ETF Positions) on the open positions will also constantly change. This is also commonly referred to as a Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.
Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient “Net Free Equity” in your Trading Account). Your ETF Broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.
Your ETF Broker determines the Variation Margin for an ETF Transaction by reference to changes in the value of the Underlying Product. In other words, each contract is effectively “marked to market” on a real-time basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Product as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Product as determined by your ETF Broker in their sole discretion.
Your ETF Broker will attempt to provide you with notice of any adverse Variation Margin by making a Margin Call (via ‘pop-up’ screens or screen alerts on the Trading Platform).
It is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call will be via a ‘pop up’ screen or screen alert which you will only receive notice of if you access your online Trading Account via your Trading Platform’s website. There may be instances where your ETF Broker does not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin your ETF Broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open ETF Transactions.
Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one ETF Transaction can be used or applied as Initial Margin or Variation Margin for another ETF Transaction.

MARGIN CALLS

Margin Calls are generally notified to you using ‘pop-up’ screens or screen alerts on your ETF Brokers Trading Platform. You are required to log into the Trading Platform regularly when you have open positions to ensure you receive notification of any Margin Calls. Often your ETF Broker will also e-mail you a notification in addition to providing a pop-up. However, your ETF Broker is under no obligation to contact you in the event of any change to the Margin Requirements or any actual or potential shortfalls in your Trading Account.

FAILING TO MEET A MARGIN CALL

If you do not meet Margin Calls immediately, some or all of your positions may be Closed Out by your ETF Broker without further reference to you.
Your ETF Broker generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your ETF Broker may Close Out some or all of your open ETF Transactions without notice to you.
The Default Liquidation Threshold is determined by the ETF Broker for your Trading Platform. It is implemented for risk management purposes, and may be varied by the ETF Broker at any time.

8. Risks of Trading in ETFs

PRODUCT RISKS

CHANGES IN THE PRICE, VALUE OR LEVEL OF THE UNDERLYING INSTRUMENT

Trading in ETFs is diverse and different types of ETFs cover the full spectrum of risk profiles. Most ETFs have some form of Market Risk. If there is an adverse change in the price, value or level of the Underlying Market, you will profit or loss to the extent of your ETF position. You are responsible for any losses that may occur as a result of adverse movements in the price of the ETF. This shortfall may, in some instances, be substantial depending on the type of ETF traded.

OTHER VARIABLES THAT COULD LEAD TO LOSS

The following is a description of some of the other significant risks associated with trading ETFs.

1

INCORRECT DETAILS ARE ENTERED:

If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome.

2

EXERCISE IN ETF BROKER’S DISCRETION TO CLOSE OUT:

Your ETF Broker has absolute discretion to Close Out any open positions at values they determine. The effect of your broker exercising their discretion is that they may Close Out your open position and you may suffer loss as a result (including actual loss or opportunity loss if the value improves from the value the open position was Closed Out). Your broker is not responsible for any such loss. This risk is more prevalent for traders making use of leverage.

3

ORDER ACCEPTANCE RISK:

When you place an order (i.e. request to open or Close Out a position), your ETF Broker has an absolute discretion whether or not to accept and execute such request. The effect of your broker’s discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. Your ETF Broker is not responsible for such loss.

4

Stop Losses:

Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order.

5

MARKET CONDITIONS:

Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions to Close Out an existing position. Market conditions may also mean that the price of the ETF may not maintain their usual relationship with the value of the Underlying Product. These circumstances could be pre-market pricing, settlement, corporate actions and price anomalies not related to standard price action.

6

FOREIGN EXCHANGE RISK:

In instances where you trade in an ETF based on an Underlying Product priced in a currency other than the nominated currency of your Trading Account, your profit or loss will be determined by movements in the price of the Underlying Product and also by the impact of movements in the exchange rate. Adverse foreign exchange rate movements could cause you to incur significant losses (or profits).

7

COUNTERPARTY RISK:

If the ETF Broker becomes insolvent, you might lose some or all of the balance of your Trading Account. You also might face considerable delays before you are able to access the amount (if any) that is able to be recovered from the ETF Broker. Therefore, you should make your own assessment of your ETF Brokers ability to perform their obligations under the ETF Transaction.

8

THE CONSEQUENCES OF ALTERING THE TERMS OF AN ETF OR TERMINATING AN ETF

Your ETF Broker, the ETF Issuer or Underlying Exchange may have the right to decide to make an adjustment in a number of circumstances if they consider an adjustment is appropriate. The ETF Broker will have a discretion to determine the extent of the adjustment so as to place the parties substantially in the same economic position they would have been in had the event giving rise to the need for the adjustment not occurred. Your ETF Broker may elect to vary or Close Out a position if an adjustment event occurs.

ISSUER RISK

Given you are dealing with the ETF Broker and the Issuer of the ETF on every ETF Transaction, you will have exposure to them in relation to each of those ETF Transactions. You should review the ETF Brokers financial accounts, along with those of the ETFs Issuer to assess their ability to meet their financial obligations.

TECHNOLOGY RISKS

There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:

1

Risks related to the use of software and/or telecommunications systems such as software errors and bugs;

2

Delays in telecommunications systems;

3

Interrupted service;

4

Data supply errors; and

5

Faults or inaccuracies and security breaches.

A disruption to a Trading Platform could mean you are unable to trade in an ETF and you may suffer a financial loss or an opportunity loss as a result.

9. Styles of ETF Trading

Today ETF Traders have the ability to create income from ETF Trading in a number of ways ranging from active to passive.

DISCRETIONARY TRADING

Discretionary Trading can be an active approach to trading ETFs. It involves making your own decision about the direction the underlying security might take and placing orders via your online platform manually (in general) in an attempt to profit from short term price fluctuations. This is an active approach to trading that is very hands-on and involves monitoring the markets on an intraday, daily or weekly basis. The advantage of Discretionary Trading is that the human brain can assess the impact of variables outside the data made available to a computer program, such as qualitative analysis of fundamental data, external data sources like bank economic forecasts and last, but not least the superior capability of the human brain when it comes to pattern recognition. The disadvantage of discretionary trading is the impact of fear, greed, and ego on the decision-making process, meaning even discretionary traders can benefit from a set of guidelines covering trade setups and risk management.

HYBRID APPROACH

Hybrid approaches to trading can also be utilised for ETF Trading, and possibly with more success than each style of trading on its own. This can include making an assessment on an underlying securities fundamental conditions based upon fundamental research, valuations and forecasts from economists, Commitment of Trader (COT) reports, sentiment or other external information and then utilising a suitable type of trading system to enter and exit the market automatically according to your view. For example say you expect the stock market to crash you might choose a trading system that only trades the short side of the market until your view is realised, then you’d switch it off. The other advantage is if your view does not materialise utilising a trading system might result is smaller losses than simply being married to a particular view and holding onto losses in that ETF Market.

SYSTEMS TRADING

Also known as Algorithmic Trading, RoboTrading and Autotrading. Systems Trading involves the use of a computer program, which makes the buy and sell decisions based upon price action, technical indicators or quantitative analysis. The advantage, if you can find a reliable trading system is that you can automate the trading on your account and the computer will monitor the markets placing orders on your behalf, which means you can devote more time to research or other endeavours. The disadvantage of trading systems is that their success rate is not high, and they’re subject to technology risks so require oversight.

COPY TRADING

Perhaps the most passive form of ETF Trading is known as Copy Trading or Mirror Trading. Copy Trading is the process of finding other traders with a track record and following their trades automatically on your account. Essentially you become your own portfolio manager and select a variety of traders to copy on your account. Copy Trading services allow you to view the track record of other traders and if you’d like to follow a trader simply click Copy on the desired strategy, enter your account number and the trades will be automatically copied into your account. You can start and stop copy trading at any time.

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