With so many investment vehicles having been introduced in the market in the past few years, it’s not surprising that most investors continuously ask to know the best option for them. Among the top products which many investors seek are ETFs and CFDs. The two investments are commonly confused, but they are the not the same. Many differences exist between the two and investors must be aware of before they commit to any of them.
Exchange Traded Funds (ETFs) are the newest in the market and are also the simplest. The prices vary on a daily basis just like shares, and they don’t have any leverage. On the other hand, Contracts for Difference (CFDs) have been on the market for a longer, and their operating is quite risky in the long term. They are only exciting if held for a short period, less than a month. Check out our Best CFD Broker information.
Cost and leverage
Generally, ETFs are considered to be low costs since they only have the standard fees and no ongoing interest rates. The case is not the same with CFDs since they have high leverage and interest rates. The ETF market is considered to be of lower risk than CFDs, as the higher leverage can lead to higher losses more quickly.
Risks and returns
The risks involved in the market are among the top considerations for any investors. The level of risk involved in CFDs is also generally very high as compared to the ETFs market. The high risk is attributed to the fact that many things could happen between the time of signing contract and the due date. For potentially greater risk and return, people are also returning back to review day trading options for Forex and options for trading cryptocurrencies such as Bitcoin, Ripple or Dash.
With ETFs, the main goal is to create money passively even without being involved in the market, the premise of ETF investments is to receive returns from the index discrepancies.
Here is a comparison between the two:
| ETFs | CFDs |
|---|---|
| Many instruments involved in the trading | A single instrument used |
| The potential reward viewed to be lower | The potential reward viewed to be high |
| Has portfolio diversification | No portfolio diversification |
| Their trading periods are in the range of shares trading. | Short term trading dominates the trading. |
| Less risky, and cheaper and therefore suitable for beginners and the risk averse investors. | The level of risk involved is very high since many activities could take place between the time of signing the contract and when its due |
| You cannot hedge a CFD using the ETF | You can use a CFD to hedge against ETFS |
ETFs have lower risks involved, and are, therefore, most suitable for young investors. CFDs are mainly used for speculation purposes, and it’s advisable for an investor to be well informed of the market before committing to CFDs. Nevertheless, both options are great for all investors provided that they are acquainted with the market techniques and trends. One should only make a decision depending on their trading experience. The choice should also depend on the investor’s ability to withstand market risks. However, always consult a professional to help you in making a more informed decision.